11 Jan You are evaluating

1.
Suppose you sell a fixed asset for $111,000 when its book value is $131,000. If your company’s marginal tax rate is 40 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

2.

You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $15,500 to purchase and which will have OCF of –$1,500 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $22,000 to purchase and which will have OCF of –$800 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their life. You intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future.

If the business has a cost of capital of 12 percent, calculate the EAC.(Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Which one should you choose?

3.

You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $58,500, has a 5-year life, and has an annual OCF (after tax) of –$10,300 per year. The Keebler CookieMunster costs $91,500, has a 7-year life, and has an annual OCF (after tax) of –$8,300 per year.

If your discount rate is 12 percent, what is each machine’s EAC?(Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

4.

Your firm needs a computerized machine tool lathe which costs $54,000 and requires $12,400 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 35 percent and a discount rate of 11 percent.

If the lathe can be sold for $5,400 at the end of year 3, what is the after-tax salvage value?(Round your answer to 2 decimal places.)

5.

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $19,800. Use of the truck will require an increase in NWC (spare parts inventory) of $1,800. The truck will have no effect on revenues, but it is expected to save the firm $20,400 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 34 percent.

What will the cash flows for this project be?(Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

6.

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $380 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $215 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $159,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $33,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 39 percent and the required return on the project is 10 percent. (Use SL depreciation table)

What will the cash flows for this project be?(Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to 2 decimal places.)