Finance Data- The Target Copy Company is contemplating the replacement

Subject: Business    / Finance
Question

The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $30,000 versus a current market value of $24,000. Target’s corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after-tax outlay for the new printing machine?

a. -$22,180

b. -$30,000

c. -$33,600

d. -$36,000

e. -$40,000

.doc#_edn1″ title=””>[i]. Dandy Product’s overall weighted average required rate of return is 10 percent. Its yogurt division is riskier than average, its fresh produce division has average risk, and its institutional foods division has below-average risk. Dandy adjusts for both divisional and project risk by adding or subtracting 2 percentage points. Thus, the maximum adjustment is 4 percentage points. What is the risk-adjusted required rate of return for a low-risk project in the yogurt division?

a. 6%

b. 8%

c. 10%

d. 12%

e. 14%

Medium:

[MACRS table required]

.doc#_edn2″ title=””>[ii]. Mars Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS accelerated method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. Mars’s marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machine costs $60,000, what is the project’s NPV?

a. -$15,394

b. -$14,093

c. -$58,512

d. -$21,493

e. -$46,901

[MACRS table required]

.doc#_edn3″ title=””>[iii]. Stanton Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000 before taxes. Stanton’s marginal tax rate is 40 percent, and it uses a 9 percent cost of capital to evaluate projects of this type. If the machine’s cost is $40,000, what is the project’s NPV?

a. $1,014

b. $2,292

c. $7,550

d. $ 817

e. $5,040

.doc#_edn4″ title=””>[iv]. Parker Products manufactures a variety of household products. The company is considering introducing a new detergent. The company’s CFO has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.)

· The project has an anticipated economic life of 4 years.

· The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost (t = 0) of $2 million. The machine will be depreciated on a straight-line basis over 4 years (that is, the company’s depreciation expense will be $500,000 in each of the first four years (t = 1, 2, 3, and 4). The company anticipates that the machine will last for four years, and that after four years, its salvage value will equal zero.

· If the company goes ahead with the proposed product, it will have an effect on the company’s net operating working capital. At the outset, t = 0, inventory will increase by $140,000 and accounts payable will increase by $40,000. At t = 4, the net operating working capital will be recovered after the project is completed.

· The detergent is expected to generate sales revenue of $1 million the first year (t = 1), $2 million the second year (t = 2), $2 million the third year (t = 3), and $1 million the final year (t = 4). Each year the operating costs (not including depreciation) are expected to equal 50 percent of sales revenue.

· The company’s interest expense each year will be $100,000.

· The new detergent is expected to reduce the after-tax cash flows of the company’s existing products by $250,000 a year (t = 1, 2, 3, and 4).

· The company’s overall WACC is 10 percent. However, the proposed project is riskier than the average project for Parker; the project’s WACC is estimated to be 12 percent.

· The company’s tax rate is 40 percent.

What is the net present value of the proposed project?

a. -$ 765,903.97

b. -$1,006,659.58

c. -$ 824,418.62

d. -$ 838,997.89

e. -$ 778,583.43

.doc#_edn5″ title=””>[v]. Virus Stopper Inc., a supplier of computer safeguard systems, uses a cost of capital of 12 percent to evaluate average-risk projects, and it adds or subtracts 2 percentage points to evaluate projects of more or less risk. Currently, two mutually exclusive projects are under consideration. Both have a cost of $200,000 and will last 4 years. Project A, a riskier-than-average project, will produce annual end of year cash flows of $71,104. Project B, of less than average risk, will produce cash flows of $146,411 at the end of Years 3 and 4 only. Virus Stopper should accept

a. B with a NPV of $10,001.

b. Both A and B because both have NPVs greater than zero.

c. B with a NPV of $8,042.

d. A with a NPV of $7,177.

e. A with a NPV of $15,968.

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