ABC Corp is considering buying a new machine for $440,000.

The new machine has an 8-year life. Assume straight-line depreciation.

The new machine will allow ABC to save $74,000/year.

ABC will sell an old machine for $52,000. The sale will take place on the same day the new machine is bought.

The old machine has an NBV = 18,000. Two years remain on the old machines' depreciable life.

The new machine will require an overhaul in year 5 = $17,000.

ABC has a 21% tax rate.

What is the net present value of the investment using a 6% discount rate?

The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent line. The equipment necessary would cost $1.31 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 10 percent of its initial cost. The company believes that it can sell 24,000 tents per year at a price of $65 and variable costs of $25 per tent. The fixed costs will be $405,000 per year. The project will require an initial investment in net working capital of $197,000 that will be recovered at the end of the project. The required rate of return is 10.8 percent and the tax rate is 40 percent. What is the NPV?

Group choice of answers

a) $521,009

b) $613,002

c) $901,995

d) $370,295

e) $430,479

Your company is considering investing in new material handling equipment for your warehouse. The new equipment will allow for savings in fuel and maintenance costs each year over 6 years. The first year savings is expected to be $3000 and that savings will decrease by $400 each subsequent year (i.e. $2600 savings year 2, $2200 savings year 3, and so on). The new equipment would cost $20,000 today, and at the end of 6 years it would have zero value. Your company would take out this money from an investment account that pays 5% nominal interest compounded annually. Is it worth buying the new material handling equipment? Why or Why not?

30. Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 20,000 dollars. It would be depreciated straight-line to 2,000 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,700 dollars. The system is expected to reduce costs by 6,300 dollars in year 1 and by 13,900 dollars in year 2. If the tax rate is 50 percent and the cost of capital is 11.88 percent, what is the net present value of the new purification system project?

NEW PROJECT ANALYSIS

You must evaluate a proposal to buy a new milling machine. The base price is $117,000, and shipping and installation costs would add another $11,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $70,200. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $5,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $31,000 per year. The marginal tax rate is 35%, and the WACC is 10%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

How should the $5,000 spent last year be handled?

Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

The cost of research is an incremental cash flow and should be included in the analysis.

Only the tax effect of the research expenses should be included in the analysis.

Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.

Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

-Select-IIIIIIIVVItem 1

What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
$

What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

Year 1 $

Year 2 $

Year 3 $

Should the machine be purchased?

The K-State Megastore is considering a new 6-year project to produce a new flag line. The equipment necessary would cost $1.37 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 15 percent of its initial cost. The company believes that it can sell 25,500 flags per year at a price of $68 and variable costs of $28 per flag. The fixed costs will be $435,000 per year. The project will require an initial investment in net working capital of $209,000 that will be recovered at the end of the project. The required rate of return is 11.1 percent and the tax rate is 40 percent. What is the NPV?

• $660,397

• $968,299

• $463,633

• $561,495

• $402,852

A machine shop owner wants to decide whether to purchase a new drill press, new lathe, or new grinder. As shown in the following table, the profit from each purchase will vary depending on whether or not the owner wins a government contract, with the owner estimating a probability of .60 of winning the contract:

Before deciding which item to purchase, the owner needs to decide whether or not to hire a military consultant to assess whether the shop will get the government contract. The track record of the military consultant in predicting whether companies would win government contracts is as follows: For 90% of the companies that won contracts, the consultant had predicted they would win, and for 70% of the companies that lost contracts, the consultant had predicted they would lose. [adapted from Taylor (2004)]

(a) Assuming the consultant would not charge for his assessment, determine the optimal strategy based on the expected value criterion, and state its expected value. (Draw then solve the Decision Tree below)

(b) Determine EVSI (with the consultant regarded as the sample information).

(c) If the consultant were to charge $5,000 for his assessment, what would be the optimal strategy and its expected value?

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $20 million, and production and sales will require an initial $5 million investment in net operating working capital. The company's tax rate is 40%.

1. What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
   $___
   
2. The company spent and expensed $150,000 on research related to the new project last year. Would this change your answer?
   -Select- Yes or No
   
3. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer?
   The project's cost will -Select- increase, decrease , or not change

1. Robert, a new client of yours, is a self-employed caterer in Santa Fe, New Mexico. Robert drives his personal van when delivering catered meals to customers. You have asked him to provide the amount of business miles driven using his vehicle. You are planning on using the standard mileage method to calculate Robert’s deduction for transportation costs. Robert has responded by saying, “Well, I don’t really keep track of my miles. I guess I drove around 3,000 miles last year for the business.” Please let us know how you would respond to Robert.
2. Your supervisor has asked you to research a potential tax deduction for a client, Nancy Fradette. Nancy is a seat-filler at a number of the award shows that are filmed in the greater Los Angeles area. Although typically seat-fillers are not compensated, Nancy is so good at the job that many of the events are willing to pay for her services. As a result, her level of seat-filling activity now rises to the level of a business, not just a hobby. In 2018, Nancy is hoping to take a trip to the National Award Show Association (NASA) Annual Conference being held in Koror, Palau, a small island country in the Pacific. Although the conference is specifically focused on the presentation of award shows, a large number of the producers of these shows attend each year. Nancy wanted to attend so she could understand the challenges an award show producer faces and thus better perform her seat-filler job. The conference is held in a remote location each year as award show producers generally prefer a high level of secrecy around the inner-workings of the shows, and the scuba-diving and weather are also pretty good. The costs to attend the conference are $1,200 for conference registration, $2,300 for air travel, $2,400 for lodging. All the meals are included in the cost of the registration and are valued at $400. Please prepare a letter to Nancy that describes the issues that Nancy will face in trying to deduct the cost of this trip. Use IRS Publication 463 (available at www.irs.gov (Links to an external site.)) to assist you.

FIN343 Bank estimates that building a new branch office in the newly developed New Heaven township will yield an annual expected return of 10 percent with an estimated standard deviation of 6 percent. The bank's marketing department estimates that cash flows from the proposed New Heaven branch will be strongly positively correlated (with a correlation coefficient of + 0.70) with the bank's other sources of cash flow. The expected annual return from the bank's existing facilities and other assets is 8 percent with a standard deviation of 5 percent. The branch will represent just 15 percent of Lifetime's total assets. Will the proposed branch increase FIN343's overall rate of return? Its overall risk?