Business Finance Fall 2015
CHAPTER 9
1. Compute the (a) net present value, (b)
internal rate of return, (c) payback period for each of the following projects.
The firm’s required rate of return is 14%.
|
YEAR |
PROJECT |
PROJECT |
|
0 |
$(270,000) |
$(300,000) |
|
1 |
120,000 |
0 |
|
2 |
120,000 |
(80,000) |
|
3 |
120,000 |
555,000 |
Which
project(s) should be purchased if they are independent? Which project(s) should
be purchased if they are mutually exclusive?
CHAPTER 10
2. Radar Railway is determining whether to
purchase a new rail setter, which has a base price of $432,000 and would cost
another $52,000 to install. The setter falls into the MACRS 3-year class, and
it would be sold after three years for 220,000. Using the setter requires a
$22,000 increase in net working capital. Although it would have no effect on
revenues the setter should save the firm $185,000 per year in before-tax
operating costs (excluding depreciation). Radar’s marginal tax rate is 40% and
its required rate of return is 14%. Should the setter be purchased? Explain.
Depreciaqtion
Year 1 – $159,720
Year 2 – $217,800
Year 3 –
$72,600
3. Otter
must decide whether to replace a 10 year-old packing machine with a new one
that costs$153,800. Replacing the old machine will increase net operating
income(excluding depreciation) from$70,000 to $110,000 and it will decrease net
working capital by $18,000. The new machine falls into MACRS 5-year class. If
the new machine is purchased, it will be sold in 6 years for $25,000, whereas,
if the old machine is kept, it will have no salvage value in 6 years. The old
machine has a current market value of $10,860 and although its current book
value is $8,000, in one year the old machine’s book value will be zero ($0).
The firm’s marginal tax rate is 40% and its required rate of return is 12%.
Should the new packing machine be purchased? Explain.
Depreciation
NEW
OLD
Year 1
-$22,760 $ 8,000
Year 2 –
$49,216 $ 0
Year 3 –
$29,222 $ 0
Year 4 –
$18,456 $ 0
Year 5 – $
16,918 $ 0
Year 6 –
$9,228 $ 0
