Question

Q4) Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $69,818.00 seven years ago. The old equipment currently has no market value. The new equipment cost $50,217.00. The new equipment will be depreciated to zero using straight-line depreciation for the four- year life of the project. At the end of the project the equipment is expected to have a salvage value of $36,150.00. The new equipment is expected to save the firm $11,084.00 annually by increasing efficiency and cost savings. The corporation has tax rate of 38.17% and a required return on capital of 9.00% a) What is the total initial cash outflow? (show as negative number -2.5 Points) b) What are the estimated annual operating cash flows? (2.5 Points) c) What is the terminal cash flow? (2.5 Points) d) What is the NPV for this project? (2.5 Points) Q5) Your corporation is considering investing in a new product line. The annual revenues (sales) for the new product line are expected to be $261,447.00 with variable costs equal to 50% of these sales. In addition annual fixed costs associated with this new product line are expected to be $46,808.00. The old equipment currently has no market value. The new equipment cost $57,753.00. The new equipment will be depreciated to zero using straight-line depreciation for the three-year life of the project. At the end of the project the equipment is expected to have a salvage value of $32,447.00. An increase in net working capital of $61,051.00 is also required for the life of the project. The corporation has a beta of 1.748, a tax rate of 35.42%, and a target capital structure consisting of 49.00% equity and 51.00% debt. Treasury securities have a yield of 2.14% and the expected return on the market is 8.23%. In addition, the company currently has outstanding bonds that have a yield to maturity of 6.52% a) What is the total initial cash outflow? (show as negative number - 2.5 Points) b) What are the estimated annual operating cash flows? (2.5 points) c) What is the terminal cash flow? (2.5 points) d) What is the corporations cost of equity? (2.5 points) e) What is the WACC? (2.5 points) f) What is the NPV for this project? (2.5 points)

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Answer 1

Q4)

a) total initial cash outflow is new equipment cost i.e. -$50,217.

b) Estimated annual operating cash flows are $11,645.

c) Terminal cash flow is $22,352 and calculated as below:

Terminal cash flow = salvage value - tax on capital gain

Tax on capital gain = (sale value - book value)*tax rate

Equipment is depreciated to zero for life of the project. so book value is zero after project ends.

Tax on capital gain = ($36,150 - $0)*38.17% = $36,150*38.17% = $13,798

Terminal cash flow = $36,150 - $13,798 = $22,352

d) NPV for this project is $3,344.57.

NPV calculation

D 1 mi Years Initial cost $50,217 Cost savings Less: Depreciation Pre-tax cash flow 6 Less: Taxes @ 38.17% After-tax cash flow 8 Add back: Depreciation Add: Salvage value Less: Tax on salvage value 11 Net cash flow -$50,217 NPV $3,344.57 Formula of NPV =NPV(0.09,D11:G11)+C11 $11,084 $12,554 -$1,470 -$561 $909 $12,554 E - 2 0 $11,084 $12,554 -$1,470 -$561 $909 $12,554 $0 $0 $11,645 F 3 0 $11,084 $12,554 -$1,470 -$561 $909 $12,554 $0 $0 $11,645 G 4 0 $11,084 $12,554 $1,470 $561 $909 $12,554 $36,150 $13,798 $33,997 10 $0 $11,645

Formulas

A Less: Less: Years Initial cost Cost savings Depreciation Pre-tax cash flow Taxes @ 38.17% After-tax cash flow Depreciation Salvage value Tax on salvage value Net cash flow NPV Formula of NPV 1-50217 11084 11084 --($C$2-0)/4 =-($C$2-0)/4 o =D3-D4 =E3-E4 =D5*38.17% =E5*38.17% =D5-D6 =E5-E6 0 =D4 =E4 lo OO lo lo =C2+C9 =D7+D8+D9-D10 =E7+E8+E9-E10 =NPV(0.09,D11:G11)+C11 =NPV(0.09,D11:611)+C11 11084 =-($C$2-0)/4 =F3-F4 =F5*38.17% =F5-F6 I=F4 JO lo =F7+F8+F9-F10 11084 --($C$2-0)/4 =G3-64 =G5*38.17% =G5-G6 =G4 36150 =G9*38.17% =G7+G8+G9-G10 9 Add back: Add: Less: