eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $50,000 to purchase and install and $36,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $62,500 per year. The firm’s cost of capital (discount rate) is 7%.
Required:
1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.)
1a. The firm is not yet profitable and therefore pays no income taxes.
1b. The firm is in the 29% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply.
1c. The firm is in the 29% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year.
2. What is the internal rate of return (IRR) of the proposed investment for situations in requirement 1, parts (a) through (c)? Use the IRR builit-in function in Excel to compute the IRR.
eEgg is considering the purchase of a new distributed network computer system to help handle its...
eEgg is considering the purchase of a new distributed network
computer system to help handle its warehouse inventories. The
system costs $65,000 to purchase and install and $34,000 to operate
each year. The system is estimated to be useful for 4 years.
Management expects the new system to reduce the cost of managing
inventories by $67,000 per year. The firm’s cost of capital
(discount rate) is 12%.
Required:
1. What is the net present value (NPV) of the proposed
investment...
Keller Construction is
considering two new investments. Project E calls for the purchase
of earthmoving equipment. Project H represents an investment in a
hydraulic lift. Keller wishes to use a net present value profile in
comparing the projects. The investment and cash flow patterns are
as follows: Use Appendix B for an approximate answer but calculate
your final answer using the formula and financial calculator
methods.
Project E
Project H
($40,000 Investment)
($36,000 Investment)
Year
Cash Flow
Year
Cash Flow...
Freedom Corporation acquired a fixed asset for $220,000. Its estimated life at time of purchase was 4 years, with no estimated salvage value. Assume a discount rate of 7% and an income tax rate of 40%. (Use Exhibit 12.4, Appendix C, TABLE 1 and Appendix C, TABLE 2.) TABLE2 Present Value of Annuity of $1 Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 20% 25% 30% 1 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901...
Bob Jensen Inc. purchased a $1,150,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments, the government has exempted taxes on profits from new investments. This legislation is to be in effect for the foreseeable future. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line depreciation. The net cash inflow is expected to be $265,000 each...
Cascade Mining Company expects its earnings and dividends to
increase by 8 percent per year over the next 6 years and then to
remain relatively constant thereafter. The firm currently (that is,
as of year 0) pays a dividend of $4.5 per share. Determine the
value of a share of Cascade stock to an investor with a 11 percent
required rate of return. Use Table II to answer the question. Round
your answer to the nearest cent.
TABLE II Present...
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $41,000 to purchase and install and $25,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $46,000 per year. The firm’s cost of capital (discount rate) is 11%. Required: 1. What is the net present value (NPV) of the proposed investment...
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $56,000 to purchase and install and $31,500 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $60,000 per year. The firm's cost of capital (discount rate) is 9%. Required: 1. What is the net present value (NPV) of the proposed investment...
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $40,000 to purchase and install and $29,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $50,000 per year. The firm’s cost of capital (discount rate) is 9%. Required: 1. What is the net present value (NPV) of the proposed investment...
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $55,000 to purchase and install and $35,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $63,000 per year. The firm’s cost of capital (discount rate) is 7%. Required: 1. What is the net present value (NPV) of the proposed investment...
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $40,000 to purchase and install and $29,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $50,000 per year. The firm’s cost of capital (discount rate) is 9%. Required: 1. What is the net present value (NPV) of the proposed investment...