1) Project Y
is estimated to cost $9,000,000 to start and will generate $2,800,000 pre-tax
income annually for 5 years with the startup cost being depreciated to zero
straight line over 4 years. You plan to
sell Project Y at the end of 5 years for $100,000. Tax regulations place your
companys tax rate at 29%. Your companys cost of capital is estimated to be
11%

a. Calculate
the net present value of the Project Y

i.
NPV = $413,924.13 (IRR = 12.86%)
b. Calculate
the profitability index of Project Y

i.
PI = 1.05

2) In addition
to your regular job, for the last three years you have operated your own
business as a crocodile wrestler, entertaining tourists at Brick Town. Assume
that you paid $6,000 for the crocodile that you have been wrestling for the
last 3 years. You can sell this crocodile for $4,000 today. You are
depreciating your current crocodile straight line for 6 years to a salvage
value of $0 at the end of 6 years. You are considering replacing your current
crocodile with a special new model (natural teeth replaced with life-like
rubber teeth) that will cost $12,000 and will be worthless at the end of 3
years. However, the combination of extra revenues (looks more ferocious) and
costs savings (fewer medical bills), will provide increased before-tax cash
flows of $6,000 per year. If you depreciate the new Safety-Croc model
straight line for 3 years to a salvage value of zero and your required rate of
return is 15%, should you replace your crocodile? Assume that you are in a 30%
tax bracket. Calculate the NPV.
a. NPV =
$3,344.45 IRR = 38.13%

3) You plan to
purchase a new gas chromatograph for your companys food-product development
lab. The machine will cost $300,000 plus $20,000 shipping and installation
costs, all of which may be depreciated. Operating the chromatograph will
require an inventory of reagents and standards which will cost $10,000 (working
capital). This inventory will be sold at the end of four (4) years for $10,000
along with the chromatograph which will be sold at the end of four (4) years
for $90,000. The chromatograph will generate revenues of $100,000 per year for
the four years. You plan to depreciate the equipment to a book value of zero
(0) over the four years using the straight-line method. Assuming that your cost
of capital is 11% and that your tax rate is 35%, calculate the NPV of this
project.
a. NPV =
$3,650.52 IRR = 11.47%

4) Temple
Corp. is considering a new project whose data are shown below. The equipment
that would be used has a 3-year tax life, would be depreciated by the
straight-line method over its 3-year life, and would have a zero salvage value.
New working capital of $6,000 is required for inventory. Revenues and other
operating costs are expected to be constant over the projects 3-year life.
What is the projects NPV and IRR?

WACC

10%

Net
investment cost (depreciable basis)

$65,000

Straight-line
depreciation

3 years

Sales
revenues, each year

$65,500

Operating
costs (excl. deprec.) each year

$25,000

Working
Capital for inventory

$6,000

Tax Rate

35%

a. NPV = $17,832
; IRR = 23.89%
1) Project Y
is estimated to cost $9,000,000 to start and will generate $2,800,000 pre-tax
income annually for 5 years with the startup cost being depreciated to zero
straight line over 4 years. You plan to
sell Project Y at the end of 5 years for $100,000. Tax regulations place your
companys tax rate at 29%. Your companys cost of capital is estimated to be
11% a. Calculate
the net present value of the Project Y
i.
NPV = $413,924.13 (IRR = 12.86%) b. Calculate
the profitability index of Project Y
i.
PI = 1.05 2) In addition
to your regular job, for the last three years you have operated your own
business as a crocodile wrestler, entertaining tourists at Brick Town. Assume
that you paid $6,000 for the crocodile that you have been wrestling for the
last 3 years. You can sell this crocodile for $4,000 today. You are
depreciating your current crocodile straight line for 6 years to a salvage
value of $0 at the end of 6 years. You are considering replacing your current
crocodile with a special new model (natural teeth replaced with life-like
rubber teeth) that will cost $12,000 and will be worthless at the end of 3
years. However, the combination of extra revenues (looks more ferocious) and
costs savings (fewer medical bills), will provide increased before-tax cash
flows of $6,000 per year. If you depreciate the new Safety-Croc model
straight line for 3 years to a salvage value of zero and your required rate of
return is 15%, should you replace your crocodile? Assume that you are in a 30%
tax bracket. Calculate the NPV. a. NPV =
$3,344.45 IRR = 38.13% 3) You plan to
purchase a new gas chromatograph for your companys food-product development
lab. The machine will cost $300,000 plus $20,000 shipping and installation
costs, all of which may be depreciated. Operating the chromatograph will
require an inventory of reagents and standards which will cost $10,000 (working
capital). This inventory will be sold at the end of four (4) years for $10,000
along with the chromatograph which will be sold at the end of four (4) years
for $90,000. The chromatograph will generate revenues of $100,000 per year for
the four years. You plan to depreciate the equipment to a book value of zero
(0) over the four years using the straight-line method. Assuming that your cost
of capital is 11% and that your tax rate is 35%, calculate the NPV of this
project. a. NPV =
$3,650.52 IRR = 11.47% 4) Temple
Corp. is considering a new project whose data are shown below. The equipment
that would be used has a 3-year tax life, would be depreciated by the
straight-line method over its 3-year life, and would have a zero salvage value.
New working capital of $6,000 is required for inventory. Revenues and other
operating costs are expected to be constant over the projects 3-year life.
What is the projects NPV and IRR?WACC 10%Net
investment cost (depreciable basis)$65,000 Straight-line
depreciation 3 years Sales
revenues, each year $65,500 Operating
costs (excl. deprec.) each year $25,000 Working
Capital for inventory $6,000 Tax Rate 35% a. NPV = $17,832
; IRR = 23.89%