Chapter 10 Making Capital Investment Decisions (3 PAGES)
Chapter 10 Making Capital Investment Decisions (3 PAGES)
2. Relevant Cash Flows Winnebagel Corp. currently sells 30,000 motor homes per
year at $45,000 each, and 12000 luxury motor coaches per year at $95,000 each. The
company wants to introduce a new portable camper to fill out its product line; it hopes
to sell 20,000 of these campers per year at $12,000 each. An independent consultant
has determined that if Winnebagel introduces the new campers, it should boost the
sales of its existing motor homes by 5,000 units per year, and reduce the sales of its
motor coaches by 1,300 units per year. What is the amount to use as the annual sales
figure when evaluating this project? Why?
13. Project Evaluation Dog Up! Franks is looking at a new sausage system with an
installed cost of $420,000. This cost will be depreciated straight-line to zero over the
project’s five-year life, at the end of which the sausage system can be scrapped for
$60,000. The sausage system will save the firm $130,000 per year in pretax operating
costs, and the system requires an initial investment in net working capital of $280,000.
If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this
project?
18. Calculating a Bid Price Kyoto Enterprises needs someone to supply it with
150,000 cartons of machine screws per year to support its manufacturing needs over
the next five years, and you’ve decided to bid on the contract. It will cost you ¥
17,580,000 to install the equipment necessary to start production; you’ll depreciate
this cost straight-line to zero over the project’s life. You estimate that in five years,
this equipment can be salvaged for ¥480,000. Your fixed production costs will be
¥4,245,000 per year, and your variable production costs should be ¥106.20 per
carton. You also need an initial investment in net working capital of ¥652,800. If
your tax rate is 35 percent and you require a 16 percent return on your investment,
what bid price should you submit?
21. Comparing Mutually Exclusive Projects Suppose in the previous problem that
HISC always needs a conveyor belt system; when one wears out, it must be replaced.
Which project should the firm choose now?
22. Calculating a Bid Price Consider a project to supply 80 million postage stamps
per year to the U.S. Postal Service for the next five years. You have an idle parcel of
land available that cost $1,000,000 five years ago; if the land were sold today, it
would net you $1,300,000, after- tax. You will need to install $3.5 million in new
manufacturing plant and equipment to actually produce the stamps; this plant and
equipment will be depreciated straight-line to zero over the project’s five-year life.
The equipment can be sold for $600,000 at the end of the project. You will also need
$800,000 in initial net working capital for the project, and an additional investment of
$40,000 in every year thereafter. Your production costs are 0.5 cents per stamp, and
you have fixed costs of $800,000 per year. If your tax rate is 34 percent and your
25. Project Evaluation Down Under Boomerang projects unit sales for a new
7-octave voice emulation implant as follows:
Year Unit Sales
1 85,000
2 98,000
3 102,000
4 114,000
5 93,000
Production of the implants will require Au$1,500,000 in net working capital to start
and additional net working capital investments each year equal to 15 percent of the
projected sales increase for the following year. Total fixed costs are Au$900,000 per
year, variable production costs are Au$240 per unit, and the units are priced at
Au$325 each. The equipment needed to begin production has an installed cost of
Au$21,000,000. Because the implants are intended for professional singers, this
equipment is considered industrial machinery and thus qualifies as seven-year
MACRS property. In five years, this equipment can be sold for about 20 percent of its
acquisition cost. Down Under is in the 35 percent marginal tax bracket and has a
required return on all its projects of 16 percent. Based on these preliminary project
estimates, what is the NPV of the project? What is the IRR?