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Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations: |
| Variable costs per unit: | ||
| Manufacturing: | ||
| Direct materials | $21 | |
| Direct labor | $13 | |
| Variable manufacturing overhead | $8 | |
| Variable selling and administrative | $1 | |
| Fixed costs per year: | ||
| Fixed manufacturing overhead | $ | 600,000 |
| Fixed selling and administrative expenses | $ | 240,000 |
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During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $57 per unit.
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In: Accounting
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $95,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,500 per year. If the machine is not replaced, it can be sold for $10,000 at the end of its useful life.
A new machine can be purchased for $170,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $60,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life; so the applicable depreciation rates are 33%, 45%, 15%, and 7%.
The old machine can be sold today for $50,000. The firm's tax rate is 40%. The appropriate WACC is 9%.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
In: Finance
The following separate scenarios relate to a 5-year lease, pertaining to equipment with a fair value of $25,000. Assume in all scenarios that payments are made at the beginning of the period.
1. Lease payments include a fixed payment of $5,000 per year.
2. Lease payments include a fixed payment of $5,000 per year, plus $250 for insurance and $300 for a maintenance contract.
3. Lease payments will be $5,000 in the first year and will increase by 3% (calculated on the previous year's payment) for each of the following 4 years.
4. Lease payments will be $5,000 in the first year and will increase each of the following years by the increase in the CPI from the preceding year. The current CPI is 120 and is expected to increase to 122 at the end of the next year.
5. Lease payments will be $5,000 in the first year and will increase each of the following years by (a) the increase in the CPI from the preceding year, or (b) 3%, whichever is greater. The current CPI is 120 and is expected to increase to 122 at the end of the next year.
6. Lease payments include a fixed payment of $5,000 per year. In addition, the lessee has guaranteed the residual value of the equipment for $1,000 at the end of the lease.
Required
For each of the six separate scenarios outlined above, and considering only the fair value lease criterion, determine how the lessee would classify the lease, assuming a discount rate of 7%.
| PV of Lease Payments | 90% of Fair Value | Lease Classification | |
|---|---|---|---|
| 1 | |||
| 2 | |||
| 3 | |||
| 4 | |||
| 5 | |||
| 6 |
In: Accounting
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Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,715,000 in annual sales, with costs of $625,000. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $195,000 at the end of the project. |
| a. | If the tax rate is 21 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) |
| b. |
If the required return is 9 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
I have gotten a Year 0 Cash Flow of -2,550,000
Year 1 CF of 937,064.23
Year 2 CF of 859,691.95
Year 3 CF of 1,108,430.80
And an NPV 355,186.94
My assignment says that the Year 0 CF and the NPV are correct, but
all of the other Cash Flows are incorrect. But the sum (NPV) is
correct, so I'm not sure what I'm doing wrong.
In: Finance
The interest rate on a one-year bond selling today is 4% and the expected interest rate on a one-year bond selling one year from today is 2%. If the liquidity premium is 0.5%, then according to liquidity premium theory, the interest rate on a two-year bond selling today is about
In: Economics
You are offered a chance to buy an asset for $4,000 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?
In: Finance
A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 9.5% and face value $1,000. Find the imputed interest income in: (a) the first year; (b) the second year; and (c) the last year of the bond’s life. (Round your answers to 2 decimal places.)
In: Finance
kennedy corp is thinking in investing in a new location the managers think that opening a new store will cost 1170. they expect the following years profits 250 in year one, 370 in year 2, in year 3 650, AND 600 IN YEAR 4. THE CURRENT wacc IS 8% WHAT IS THE npV OF THIS INVESTMENT?
In: Finance
In: Math
You are offered a chance to buy an asset for $8,000 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?
In: Finance