Consider the case of Alexander Industries:

Alexander Industries is considering a project that requires an investment in new equipment of $3,360,000. Under the new tax law, the equipment is eligible for 100% bonus depreciation at t = 0 so the equipment will be fully depreciated at the time of purchase. Alexander estimates that its accounts receivable and inventories need to increase by $640,000 to support the new project, some of which is financed by a $256,000 increase in spontaneous liabilities (accounts payable and accruals). The company's tax rate is 25%.

The after-tax cost of Alexander’s new equipment is_____________

Alexander’s initial net investment outlay is_______________

Suppose Alexander’s new equipment is expected to sell for $200,000 at the end of its four-year useful life, and at the same time, the firm expects to recover all of its net operating working capital (NOWC) investment. Remember, that under the new tax law, this equipment was fully depreciated at t = 0. If the firm’s tax rate is 25%, what is the project’s total termination cash flow?

ASSIGNMENT

PNB Berhad is considering the purchase of a new production machine under its expansion programme. It costs RM500,000 and requires installation costs of RM50,000. The old stamping machine has zero terminal book value and five years of useful life remaining. It is being depreciated using the straight-line method. It was purchased five years ago for RM250,000, and can be sold today for RM100,000.

With the use of the new machine, sales in each of the next five years are expected to increase by RM250,000, and expenses (excluding depreciation) will represent 50% of sales. This new machine will not affect the company’s net working capital requirements. The new machine is estimated to have a useful life of five years with RM50,000 salvage value and will be depreciated using the straight-line method

The company is subject to a 25% tax rate and its cost of capital is 12%. The desired payback period is five years.

Required:

a) Determine the initial outlay and annual differential cash flows attributable to the new production machine.

b) Compute the following for the new machine:

i. Payback period

ii. Net present value

iii. Internal rate of return

c) Make a recommendation to accept or reject the new production machine. Justify your answer.

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt–equity ratio of .68. It’s considering building a new $65.8 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.83 million in perpetuity. There are three financing options:

A new issue of common stock: The required return on the company’s new equity is 15 percent.

A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.3 percent, they will sell at par.

Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .13. (Assume there is no difference between the pretax and aftertax accounts payable cost.)

If the tax rate is 38 percent, what is the NPV of the new plant? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16.)

Net present value

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt–equity ratio of .57. It’s considering building a new $71.2 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.87 million in perpetuity. There are three financing options:

A new issue of common stock: The required return on the company’s new equity is 15 percent.

A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.2 percent, they will sell at par.

Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .15. (Assume there is no difference between the pretax and aftertax accounts payable cost.)

If the tax rate is 30 percent, what is the NPV of the new plant? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16.)

Net present value            $

Your company's new portable phone/music player/PDA/bottle washer, the RunMan, will compete against the established market leader, the iNod, in a saturated market. (Thus, for each device you sell, one fewer iNod is sold.) You are planning to launch the RunMan with a traveling road show, concentrating on two cities, New York and Boston. The makers of the iNod will do the same to try to maintain their sales. If, on a given day, you both go to New York, you will lose 900 units in sales to the iNod. If you both go to Boston, you will lose 650 units in sales. On the other hand, if you go to New York and your competitor to Boston, you will gain 1,600 units in sales from them. If you go to Boston and they to New York, you will gain 600 units in sales. What fraction of time should you spend in New York and what fraction in Boston?

You should spend of your time in New York and in Boston.

How do you expect your sales to be affected?

The expected outcome is a net gain in RunMan sales. The expected outcome is a net loss of RunMan sales.     The expected outcome is no net gain or loss of RunMan sales.

In 2017 Lachie Ltd decided to develop a surfboard out of a new type of damage resistant plastic. In 2017 $510,000 was spent on research and aimed at understanding the properties of this new product, which if utilised should lead to signigificant future economic benefits.

In 2018 Lachie Ltd developed a prototype of its surfboard, which it had tested by several local surfers. Costs involved were $780,000 and orders were received from several local retailers. In anticipating demand for the new sufboard, Lachie spent $25,000 on legal costs to register its patent for the new design.

In 2019 Lachie Ltd undertook an international advertising campaign at a cost of $1m. Within the next few months orders were received for $40m for the new surfboard. As a result their accountant calculated that the present value of the new surfboard was $200m, which Lachie Ltd wanted to reflect in the company's balance sheet. A major competitor made a legally binding offer of $150m to purchase the patent for the new surfboard.

Describe how to account for the above transaction and events in accordance with AASB138 Intangibles and AASB13 Fair value measurement:

1. How much is the carrying amount of the asset, if any in 2019?

2. Can the asset if any, be revalued upwards?

Suda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $5,000 and will be put into operation for the next three years. The asset will be depreciated using a three-year recovery schedule (with MARCS depreciation rates of 45%, 33%, 15%, 7% for years 1 to 4). The existing equipment, which originally cost $25,000 is fully depreciated and has no salvage value today. The new equipment is expected to result in incremental before tax revenue of $15,000 per year but has no effect on cost. As a result of this replacement, net working capital rises by $5,000 today but will be recovered at the end of the 3rd year. The new machine is expected to be sold for $15,000 before taxes at the end of 3rd year. The firm has a 40 percent tax rate and its cost of capital is 10%.

a) What is the new asset's initial cash outlay?
b) What are the new asset's depreciations?
c) What are the new  asset's operating cash flows for the years 1, 2, & 3?
d) What is the new  asset's terminal cash flow?
e) What is the NPV of this asset? Should Suda buy the new asset?

Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information:

If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above.

The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 11% discount rate.

Required:

1. What is the net present value of the “keep the old truck” alternative?

2. What is the net present value of the “purchase the new truck” alternative?

3. Should Bilboa Freightlines keep the old truck or purchase the new one?

Rocky Road Bikes is evaluating the possibility of offering a new top-of-the-line bike model. The company’s market research team estimates that first year sales of the new model will be 25,000 units at the proposed price of $750.00 per unit and estimated cost per unit of $275.00. Sales are expected to grow 4% per year in each of the following 5 years, until the new model is discontinued at the end of year 6. The market research team also estimates the introduction of the new model will erode sales of the current top model by a constant 5,000 units per year. The current top model has a price of $500.00 and associated costs of $145.00. The required tooling and machinery to manufacture the new model will cost a total of $15,000,000, and this will be depreciated on a straight-line basis over the six-year life of the project to zero. The company expects to be able to sell the machinery at the end of the project for $3,000,000. There will also be fixed costs associated with the new model of $6,000,000 per year. The new model will require an increase in working capital of $250,000 which will be returned at the end of the project. Rocky Road has a tax rate of 35%, and management believes that the discount rate for this project should be 12%. What is the Payout Period, the NPV, and the IRR of this project?

The New York City subway station needs a modern transport solution for accessing a busy maintenance depot that services the L train. A second-hand system will cost $75,000; a new system will cost $150,000. Both systems have a useful life of five years. The market value of the used system is expected to be $20,000 at the end of the useful lifetime, whereas the market value of the new system is anticipated to be $50,000 in five years. Current maintenance activity will require the used system to be operated 8 hours per day for 20 days per month. The new system with improved technology can decrease labor hours by 15%, compared to the used system. If labor costs $35 per hour and the MARR is 1% per month, calculate the difference between the annual worth of the used system and the new system (e.g., AW(Used System) – AW (New System)). If you believe the new system has a greater worth than the used system, this would be a negative number; if you believe the used system has greater worth, this would be a positive number. Report your answer to the nearest dollar. Hint: be careful when converting between a monthly basis and an annual basis to arrive at the difference in the annual worth.