05 Jun Laurels Lawn Care Ltd., has a new mower line that can generate revenues of $129,000 per year. Direct production costs are $43,000, and the fixed cost

1. Laurel’s Lawn Care Ltd., has a new mower line that can generate revenues of $129,000 per year. Direct production costs are $43,000, and the fixed costs of maintaining the lawn mower factory are $16,500 a year. The factory originally cost $0.86 million and is being depreciated for tax purposes over 20 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 25% enter your answer in dollars not millions

Operating cash flow is _________

2. Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $190,000 and sell its old low-pressure glueball, which is fully depreciated, for $34,000. The new equipment has a 10-year useful life and will save $42,000 a year in expenses. The opportunity cost of capital is 11%, and the firm’s tax rate is 21%. What is the equivalent annual saving from the purchase if Gluon can depreciate 100% of the investment immediately. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Equivalent annual savings is _________

3. Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $36,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $9,000. The grill will have no effect on revenues but will save Johnny’s $18,000 in energy expenses. The tax rate is 30%.

 

Required:

a. What are the operating cash flows in each year? b. What are the total cash flows in each year? c. Assuming the discount rate is 10%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?

 

Complete this question by entering your answers in the tabs below.

· Required A

· Required B

· Required C

What are the operating cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Year Operating Cash Flows 1 2 3

4. PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $95 million on equipment with an assumed life of 5 years and an assumed salvage value of $20 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $80 million. A new modem pool can be installed today for $150 million. This will have a 3-year life and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $34 million per year and decrease operating costs by $17 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm’s tax rate is 30% and the discount rate for projects of this sort is 15%.

 

Required:

a. What is the net cash flow at time 0 if the old equipment is replaced? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

b. What are the incremental cash flows in years (i) 1; (ii) 2; (iii) 3? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

c. What is the NPV of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places.)

d. What is the IRR of the replacement project? (Do not round intermediate calculations. Enter the IRR as a percent rounded to 2 decimal places.)

	a. Net cash flow million b. Incremental cash flow million per year c. NPV million d. IRR %

5. Revenues generated by a new fad product are forecast as follows:

 

Year	Revenues
1	$40,000
2	20,000
3	15,000
4	10,000
Thereafter	0

 

Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $46,000 in plant and equipment.

 

a. What is the initial investment in the product? Remember working capital.

b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 20%, what are the project cash flows in each year? Assume the plant  and equipment are worthless at the end of 4 years.

c. If the opportunity cost of capital is 10%, what is the project's NPV?

d. What is project IRR?

 

Complete this question by entering your answers in the tabs below.

· Req A

· Req B

· Req C and D

What is the initial investment in the product? Remember working capital.

	Initial investment

6. Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $694,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year’s forecast sales. The firm estimates production costs equal to $2.00 per trap and believes that the traps can be sold for $8 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 35%, and the required rate of return on the project is 10%. Use the  MACRS depreciation schedule .

 

Year:	0	1	2	3	4	5	6	Thereafter
Sales (millions of traps)	0	0.4	0.5	0.6	0.6	0.8	0.5	0

a. What is project NPV? (Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.)

 

b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? (Do not round intermediate calculations. Enter your answer in whole dollars not in millions.)

 The NPV Increases by ____________________

7. Quick Computing installed its previous generation of computer chip manufacturing equipment 3 years ago. Some of that older equipment will become unnecessary when the company goes into production of its new product. The obsolete equipment, which originally cost $38.00 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $17.60 million. The firm’s tax rate is 30%. What is the after-tax cash flow from the sale of the equipment? (Enter your answer in millions rounded to 1 decimal place.)

After-Tax cash flow is ______________

8.  If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.)

b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Annual operating cash flow in 0 years __________

Annual operating cash flow in 1 to 6 years ___________

NPV ________

NPV ________

Canyon Tours showed the following components of working capital last year:

 

	Beginning of Year	End of Year
Accounts receivable	$	24,400		$	23,200
Inventory		12,200			12,900
Accounts payable		14,700			16,900

   

a. What was the change in net working capital during the year? (A negative amount should be indicated by a minus sign.)

b.  If sales were $36,200 and costs were $24,200, what was cash flow for the year? Ignore taxes.

 

8. A firm had after-tax income last year of $2.6 million. Its depreciation expenses were $0.2 million, and its total cash flow was $2.6 million. What happened to net working capital during the year?

Net Working Capital ______ millions

9. The efficiency gains resulting from a just-in-time inventory management system will allow a firm to reduce its level of inventories permanently by $379,000. What is the most the firm should be willing to pay for installing the system?

Firm should willingly pay ___________

10. Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.6 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $643,000. The firm believes that working capital at each date must be maintained at a level of 15% of next year’s forecast sales. The firm estimates production costs equal to $1.90 per trap and believes that the traps can be sold for $6 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 40%, and the required rate of return on the project is 12%.

 

Year:	0	1	2	3	4	5	6	Thereafter
Sales (millions of traps)	0	0.4	0.5	0.7	0.7	0.5	0.3	0

 

Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV?

Change in NPV _____ millions

11. The following are the cash flows of two independent projects:

 

Year	Project A	Project B
0	$	(290	)	$	(290	)
1		170			190
2		170			190
3		170			190
4		170

 

a. If the opportunity cost of capital is 11%, calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

Which of these projects is worth pursuing?

 

multiple choice

· Project A

· Project B

· Both

Neither

The following are the cash flows of two projects:

 

Year	Project A	Project B
0	$	(370	)	$	(370	)
1		200			270
2		200			270
3		200			270
4		200

 

If the opportunity cost of capital is 10%, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

 

Answer is complete but not entirely correct.

	Project Profitability Index A 1.7134.selected answer incorrect B 1.8147.selected answer incorrect

Blooper’s analysts have come up with the following revised estimates for its magnoosium mine:

 

	Range
	Pessimistic		Optimistic
Initial investment	+	50	%		–	25	%
Revenues	–	25	%		+	20	%
Variable costs	+	15	%		–	25	%
Fixed cost	+	25	%		–	45	%
Working capital	+	25	%		–	40	%

 

Conduct a sensitivity analysis for each variable and range and compute the NPV for each. Use  Spreadsheet 10.1  and accompanying data as a starting point for the analysis. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers in thousands rounded to the nearest whole dollar.)

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