Problem 1
Zippy Corporation just purchased computing equipment for $28,000. The equipment will be depreciated using a five-year MACRS depreciation schedule. If the equipment is sold at the end of its fourth year for $12,000, what are the after-tax proceeds from the sale, assuming the marginal tax rate is 35 percent. (Round answer to 2 decimal places, e.g. 15.25.)
After-tax proceeds ___$
Problem 2
Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12 million. This investment will consist of $2 million for land and $9.80 million for trucks and other equipment. The land, all trucks, and all other equipment are expected to be sold at the end of 10 years for a price of $5 million, which is $2 million above book value. The farm is expected to produce revenue of $2 million each year, and annual cash flow from operations equals $1.84 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment. (Round intermediate calculations to 4 decimal palces, e.g. 0.5275 and final answer to 2 decimal places, e.g. 15.25.)
NPV ___$
The project should be
Problem 3
You are starting a family pizza parlor and need to buy a motorcycle for delivery orders. You have two models in mind. Model A costs $9,400 and is expected to run for 6 years; model B is more expensive, with a price of $15,200 and has an expected life of 10 years. The annual maintenance costs are $800 for model A and $700 for model B. Assume that the opportunity cost of capital is 11 percent. Calculate EAC for both the models and choose which one should you buy? (Round intermediate calculations and final answers to 2 decimal places, e.g. 15.25.)
The EAC of Model A is ___$
The EAC of Model B is ___$
Since EAC is lower for ____, you should buy.
Problem 4
Merton Shovel Corporation has decided to bid for a contract to supply shovels to the Honduran Army. The Honduran Army intends to buy 1,500 shovels per year for the next 3 years. To supply these shovels, Merton will have to acquire manufacturing equipment at a cost of $175,000. This equipment will be depreciated on a straight-line basis over its five-year lifetime. At the end of the third year, Merton can sell the equipment for exactly its book value ($70,000). Additional fixed costs will be $38,000 per year, and variable costs will be $2 per shovel. An additional investment of $22,600 in net working capital will be required when the project is initiated. This investment will be recovered at the end of the third year. Merton Shovel has a 35 percent marginal tax rate and a 16 percent required rate of return on the project. What is the lowest possible per shovel price that Merton can offer for the contract and still create value for its stockholders? (Round answer to 2 decimal places, e.g. 15.25.)
Shovel price ____$
Problem 5
ACME Manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labor than the existing line. The new line would cost $1 million, have a five-year life, and be depreciated using MACRS over three years. At the end of five years, the new line could be sold as scrap for $1,040,000 (in year 5 dollars). Because the new line is more automated, it would require fewer operators, resulting in a savings of $79,000 per year before tax and unadjusted for inflation (in today's dollars). Additional sales with the new machine are expected to result in additional net cash inflows, before tax, of $65,000 per year (in today's dollars). If ACME invests in the new line, a one-time investment of $10,000 in additional working capital will be required. The tax rate is 35 percent, the opportunity cost of capital is 10 percent, and the annual rate of inflation is 3.50 percent. What is the NPV of the new production line? (Round intermediate calculations and final answer to the nearest whole dollar, e.g. 5,275. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
NPV ___$
Problem 6
The alternative to investing in the new production line is to overhaul the existing line, which currently has both a book value and a salvage value of $0. It would cost $ 330,000 to overhaul the existing line, but this expenditure would extend its useful life to five years. The line would have a $0 salvage value at the end of five years. The overhaul outlay would be capitalized and depreciated using MACRS over three years. The tax rate is 35 percent, the opportunity cost of capital is 12 percent. The NPV of the new production line is $ -296,000 . Should ACME replace or renovate the existing line? (Round your intermediate calculations and final answer to the nearest dollar, e.g. 5,275. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
NPV of renovating old line ___$
ACME should the existing line.
Attachment:- week assignment.xlsx