DVU Capital Investment Analysis and Decision Questions

Description

1. A project has an initial cost of $45,000, expected net cash inflows of $11,000 per year for 7 years, and a cost of capital of 9%. What is the project’s NPV? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to the nearest cent.

2. A project has an initial cost of $45,000, expected net cash inflows of $15,000 per year for 8 years, and a cost of capital of 10%. What is the project’s PI? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to two decimal places.

3. The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:

Projected sales$22 millionOperating costs (not including depreciation)$7 millionDepreciation$4 millionInterest expense$4 million

The company faces a 25% tax rate. What is the project’s operating cash flow for the first year (t = 1)? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar.

4. Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $10.8 million, of which 65% has been depreciated. The used equipment can be sold today for $5.4 million, and its tax rate is 25%. What is the equipment’s after-tax net salvage value? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

5. The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $950,000, and it would cost another $17,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $559,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $15,000. The sprayer would not change revenues, but it is expected to save the firm $381,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

What is the Year-0 net cash flow? $

What are the net operating cash flows in Years 1, 2, and 3?Year 1: $ Year 2: $ Year 3: $

What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? $

If the project’s cost of capital is 13%, what is the NPV of the project? $ Should the machine be purchased?

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