Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 16,200 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 2,900 dollars. The system is expected to reduce costs by 4,500 dollars in year 1 and by 12,200 dollars in year 2. If the tax rate is 50 percent and the cost of capital is 5.07 percent, what is the net present value of the new purification system project?

Question 8

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Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 16,200 dollars. It would be depreciated straight-line to 2,200 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 3,400 dollars. Without the new oven, costs are expected to be 10,600 dollars in 1 year and 16,300 in 2 years. With the new oven, costs are expected to be -600 dollars in 1 year and 13,200 in 2 years. If the tax rate is 50 percent and the cost of capital is 11.11 percent, what is the net present value of the new oven project?

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The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent line. The equipment necessary would cost $2.03 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 31,500 tents per year at a price of $80 and variable costs of $39 per tent. The fixed costs will be $555,000 per year. The project will require an initial investment in net working capital of $257,000 that will be recovered at the end of the project. The required rate of return is 12.3 percent and the tax rate is 40 percent. What is the NPV?

NEW PROJECT ANALYSIS

You must evaluate a proposal to buy a new milling machine. The base price is $142,000, and shipping and installation costs would add another $19,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $49,700. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $5,000 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 $54,000 per year. The marginal tax rate is 35%, and the WACC is 14%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. How should the $5,000 spent last year be handled?
   1. Only the tax effect of the research expenses should be included in the analysis.
   2. 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.
   3. 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.
   4. 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.
   5. The cost of research is an incremental cash flow and should be included in the analysis.
   
   

2. 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.
   $

3. 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 $

4. Should the machine be purchased?
   

NEW PROJECT ANALYSIS

You must evaluate a proposal to buy a new milling machine. The base price is $125,000, and shipping and installation costs would add another $15,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $62,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $4,500 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 $49,000 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.

1. How should the $5,000 spent last year be handled?
   1. 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.
   2. 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.
   3. The cost of research is an incremental cash flow and should be included in the analysis.
   4. Only the tax effect of the research expenses should be included in the analysis.
   5. 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.
   
   -Select-IIIIIIIVVItem 1

2. 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.
   $

3. 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 $

4. Should the machine be purchased?
   -Select-YesNo

A quaint but well-established coffee shop, the Hot New Café, wants to build a new café for increased capacity. Consider the following financial aspects of this endeavor: Expected sales are $800,000 for the first 5 years. Direct costs, including labor and materials, will be 50% of sales. Indirect costs are estimated at $200,000 a year. The cost of the building for the new café will be a total of $850,000, which will be depreciated straight line over the next 5 years. The firm's marginal tax rate is 38%, and its cost of capital is 10%. For this assignment, you need to develop a capital budget. It is important to know what the café managers should consider within their capital budget. You must also define the key terms necessary to understand capital budgeting. In this assignment, please show all work, including formulae and calculations used to arrive at financial values. You must answer the following using the information above: Prepare a capital budget for the Hot New Café with the net cash flows for this project over a 5-year period. Calculate the payback period (P/B) and the net present value (NPV) for the project. Answer the following questions based on your P/B and NPV calculations: Do you think the project should be accepted? Why? Define and describe net present value (NPV) as it pertains to the new cafe. Assume the company has a P/B (payback) policy of not accepting projects with a life of over 3 years. Do you think the project should be accepted? Why?

The New York City Hospital has just acquired new equipment. The equipment cost $4,250,000 and the organization spent $135,000 on upgrading the physical plant the new equipment will be located in. The equipment is expected to have a 10 year useful life and a salvage value of 10% ($425,000). Calculate the first 5 years of depreciation using SL, DDB and SYD.

With the increase in technology, new inventory methods have evolved. How do these new inventory systems correlate with the advancement of accounting information systems?

Profit or Loss on New Stock Issue

Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows:

The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $500,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?

1. $5.25 per share? Use minus sign to enter loss, if any.
   $
   
2. $6.25 per share? Use minus sign to enter loss, if any.
   $
   
3. $4 per share? Use minus sign to enter loss, if any.
   $