ZuoTi.Pro
Question

Acme Storage

Acme Storage currently has a revenue of $100,000 per year and is earning a gross profit margin of 40%. The firm is considering a new project which will double both the revenue and the operating cost for the following three years. The new project requires purchase of an equipment that is worth $300,000. The equipment will be depreciated linearly over the next three years. At the end of the third year, the equipment will be fully depreciated, but the firm can still sell it on the market for $100,000.

 

a)     Assume a tax rate of 40% and a discount rate of 10%. What is the NPV of the project?

 

b)    What is the NPV of the project if at the end of the third year, the equipment still has a book value of $200,000 after deprecation, but the firm can only sell it on the market for $100,000?

 

c)     Now let us stick to the original assumptions in the problem, do you think the IRR of the investment is higher or lower than 10% (you don’t need to calculate the actual IRR)? What is the payback period for this investment?

 


finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Request Professional Answer

Request Answer!

We need at least 10 more requests to produce the answer.

0 / 10 have requested this problem solution

The more requests, the faster the answer.

Request! (Login Required)

All students who have requested the answer will be notified once they are available.
Know the answer?
Add Answer to:
Acme Storage
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Similar Homework Help Questions

  • Question 1 Every two years, Warrior Lacrosse develops year, the company has invested $25,000 in their...

    Question 1 Every two years, Warrior Lacrosse develops year, the company has invested $25,000 in their latest stick, the Warrior-X. In addition, the firm has hired a consultant, for $10,000 to determine whether there will be a market for the stick. The consultant has advised the firm to go ahead and start Warrior expects to the new equipment will be depreciated using 3-year MACRS. In three years, Warrior plans to sell the equipment for $25,000. The company expects to produce...

  • Down Under Boomerang, Inc. is considering a new three-year expansion project that requires an ini...

    Down Under Boomerang, Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $2.4 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,050,000 in annual sales, with costs of $950,000. The tax rate is 35% and the required return is 12 percent. Calculate the projects NPV and IRR. Suppose that Down Under Boomerang is projected...

  • A company is considering launching a new product. The initial startup costs will be $100,000 and...

    A company is considering launching a new product. The initial startup costs will be $100,000 and the product will provide returns of $40,000 in year 1, 40,000 in year 2 and $31,757.60 in the third year. a) Calculate the NPV using a MARR of 5% Calculate the NPV using a MARR of 7% Calculate the NPV using a MARR of 6% Calculate the IRR of the project. 3. You have decided to start a new magazine. Minum will be targeted...

  • ACME manufacturing is considering replacing an existing production line with a new line that has a...

    ACME manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labour than the existing line. The existing line, which was purchased several years ago, originally cost $500,000 and currently has a book value of $250,000. The new line would cost $750,000 and would be depreciated on a straight-line basis over a useful life of 5 years. At the end of five years, the new line could be...

  • 2. A company is considering launching a new product. The initial startup costs will be $100,000...

    2. A company is considering launching a new product. The initial startup costs will be $100,000 and the product will provide returns of $40,000 in year 1, 40,000 in year 2 and $31,757.60 in the third year. Calculate the NPV using a MARR of 5% b) Calculate the NPV using a MARR of 7% Calculate the NPV using a MARR of 6% d) Calculate the IRR of the project. a) You have decided to start a new magazine. Minum will...

  • Problems with the IRR method Acme Oscillators is considering an investment project that has the following...

    Problems with the IRR method Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern. Year AWNIO Cash Flow $100 - 460 793 - 602.3 171.3 a. Calculate the project's NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, 40%, 50%. b. What do the calculations tell you about this project's IRR? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital....

  • thats all i have info for the question plz help due in less than 2 hours...

    thats all i have info for the question plz help due in less than 2 hours 6. Summer Tyme, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.9 million. The fixed asset falls into the three-year MARCRS class and will be depreciated over its three-year tax life. The project is estimated to generate $2,650,000 in annual sales, with costs of $840,000. Suppose the project requires an initial investment in net working capital...

  • Your company produces candy and considers introducing a new flavor. A year ago, the company spent...

    Your company produces candy and considers introducing a new flavor. A year ago, the company spent $19,300 on a marketing survey to learn about consumer interest in this flavor. If this new type of a candy is produced and offered for sale, the estimated revenue in Year 1 is $450,000. Sales are forecasted to grow at a rate of 4% per year. Incremental variable costs are expected to be 60% of incremental revenues. The net working capital in Year 0...

  • Revenues Expenses are generated by a new fad product are forecast as follows: Year Revenues 1...

    Revenues Expenses are generated by a new fad product are forecast as follows: Year Revenues 1 $65,000 2 $50,000 3 $40,000 4 $30,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $60,000 in plant and equipment. Required: a. What is the initial investment in the product? Remember working capital. b. If the plant...

  • Problem 1 Acme is considering the purchase of a machine. Data are as follows: Cost- ₱160,000...

    Problem 1 Acme is considering the purchase of a machine. Data are as follows: Cost- ₱160,000 Useful life- 10 years Annual straight-line depreciation ₱ ??? Expected annual savings in cash operation costs- ₱33,000 Acme's cutoff rate is 12% and its tax rate is 40%. Required: 1. Compute the annual net cash flows for the investment. 2. Compute the NPV of the project. 3. Compute the IRR of the project.

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT