Holland Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,350,000. Producing the cell phone requires an investment in new equipment, costing $1,440,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $180,000. Working capital is also expected to increase by $180,000, which Holland will recover by the end of the new product’s life cycle. Annual cash operating expenses are estimated at $810,000. The required rate of return is 8%.

1. Prepare a schedule of the projected annual cash flows.

2. Calculate the NPV using only discount factors listed below:

Discount Factor

Year 0    1.00000

Year 1    0.92593

Year 2    0.85734

Year 3    0.79383

Year 4    0.73503

Year 5    0.68058

3. Calculate the NPV using discount factors listed below:

Discount Factor

Year 0    1.00000

Year 1-4 3.31213

Year 5    0.68058

Nicole’s Getaway Spa (NGS) purchased a hydrotherapy tub system to add to the wellness programs at NGS. The machine was purchased at the beginning of the year at a cost of $25,000. The estimated useful life was five years and the residual value was $1,000. Assume that the estimated productive life of the machine is 10,000 hours. Expected annual production was year 1, 2,550 hours; year 2, 2,300 hours; year 3, 2,050 hours; year 4, 2,100 hours; and year 5, 1,000 hours. Assume NGS sold the hydrotherapy tub system for $7,500 at the end of year 3.The following amounts were forecast for year 3: Sales Revenues $62,000; Cost of Goods Sold $48,000; Other Operating Expenses $4,800; and Interest Expense $1,000. Create an income statement for year 3 for each of the different depreciation methods, ending at Income before Income Tax Expense. (Don't forget to include a loss or gain on disposal for each method.). (Do not round intermediate calculations. Round your answers to the nearest dollar amount.Forcasted income statement.

1. Brower, Inc. just constructed a manufacturing plant in Europe. The construction cost 10 million Euros. Brower intends to leave the plant open for three years. During the three years of operation, Euro cash flows are expected to be 1 million euros, 2 million euros, and 3 million euros, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Brower expects to sell the plant for 8 million euros. Brower has a required rate of return of 10 percent. The current exchange rate is $1.18/euro and the Euro is expected to depreciate to $1.15/euro in year 1, $1.14/euro in year 2 and $1.13/euro in year 3.

1. Determine the NPV for this project. Should Brower build the plant?

2. How would your answer change if the value of the euro was expected to appreciate from its current value of $1.18/euro to $1.21/euro in year 1, $1.23/euro in year 2 and $1.25/euro in year 3?

a.Year 0

Year 1

Year 2

Year 3

b.NPV

1. What is the effective annual rent for Lease 1 and Lease 2? When you compute the answer, assume the annual discount rate is 7%. Also assume annual rents are paid once per year.

   1. Lease 1 is 5 years. The base rent in 2020 is $13.50 per square foot per year. Each year, the base rent increases by $0.50 per year.

Lease 2 is 6 years. The base rent in 2020 is $13.00 per square foot per year. Each year, the base rent increases by 5% per year.

1. You own a building with 100,000 leasable square feet. One tenant rents 60,000 square feet and the other 40,000 square feet are vacant. The utilities bill for the year was $80,000. The fixed cost of utilities is $25,000 per year.  

   1. A new tenant enters the building and rents 10,000 square feet. What is the new utilities bill of the building?  

The new tenant has a base stop of $0.80 per square foot. What are recoveries for utilities from this tenant?

Your company has launched a new insurance product and is projecting the premium cashflows, for budgeting purposes. You expect to steadily acquire new clients over the first year at a constant rate, and are projecting having 1,000 clients by the end of the year. Each client pays an annual premium of $10 in the first year.

The company expects slower growth in clients in Years 2 and 3, with 500 new clients in Year 2, and 200 new clients in Year 3. They also expect some lapses, whereby 10% of those who paid the premium in their first year do not make the second year of payments. Premiums will remain fixed at $10 per year for the three year period.

Define ?(?) as the total premium paid between time 0 and time ?.

1. Derive the expression(s) for ?(?) for the period ? = 0 through to ? = 3.
2. If there is a constant force of interest of 5% over the three years, write down the expression for the present value of this stream of premium payments.

M(t) is the total premium paid between time 0 and time t

Top-Ten Inc. is considering replacing its existing machine that is used to produce musical CDs. This existing machine was purchase 3 years ago at a base price of $50,000. Installation costs at the time for the machine were $1,000. The existing machine is considered a 3-year class for MACRS. The existing machine can be sold today for $40,000 and for $10,000 in 3 years. The new machine has a purchase price of $90,000 and is also considered a 3-year class for MACRS. Installation costs for the new machine are $7,000. The estimated salvage value of the new machine is $30,000. This new machine is more efficient than the existing one and thus savings before taxes using the new machine are $8,000 a year. The company's marginal tax rate is 30% and the cost of capital is 12%. For this project, what is the incremental cash flow in year 1?

3 Year MACRS percentages

Year 1= 33.33%

Year 2=44.45%

Year 3=14.81%

Year 4=7.41%

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,060,000 in annual sales, with costs of $759,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $270,000 at the end of the project.
  
If the tax rate is 35 percent, what is the project’s Year 1 net cash flow? Year 2? Year 3? Table 8.3. (Enter your answers in dollars, not millions of dollars. A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 1,234,567.89.)

If the required return is 13 percent, what is the project's NPV? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 1,234,567.89.)
  
NPV           $

Project cash flow and NPV. The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds (1957 replicas). The necessary foundry equipment will cost a total of $4,200,000 and will be depreciated using a five-year MACRS life rate. The sales manager has an estimate for the sale of the classic Thunderbirds. The annual sales volume will be as follow:

Year one: 260 Year four: 380

Year two: 290 Year five: 300

Year three: 330

If the sales price is $30,000 per car, variable costs are $18,000 per car, and fixed costs are $1,200,000 annually, what is the annual operating cash flow if the tax rate is 30%?

The equipment is sold for salvage for $500,000 at the end of year five. Net working capital increases by $500,000 at the beginning of the project? (year 0) and is reduced back to its original level in the final year. Find the internal rate of return for the project using the incremental cash flows. (Hint: Find the annual operating cash flow of the project for years 1-5 and making an income statement)?