Investment Outlay
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Get Help Now!Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $11 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 35%.
- What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
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Operating Cash Flow
The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:
Projected sales | $25 million |
Operating costs (not including depreciation) | 11 million |
Depreciation | 4 million |
Interest expense | 4 million |
The company faces a 40% tax rate. What is the project’s operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
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Net Salvage Value
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $25 million, of which 70% has been depreciated. The used equipment can be sold today for $8.75 million, and its tax rate is 40%. What is the equipment’s after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
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New-Project Analysis
The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm’s R&D department. The equipment’s basic price is $120,000, and it would cost another $18,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $42,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,800. The machine would have no effect on revenues, but it is expected to save the firm $48,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 30%.
- What is the Year-0 net cash flow? If the answer is negative, use minus sign.
$ - What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
Year 1 | $ |
Year 2 | $ |
Year 3 | $ |
- What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar.
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Inflation Adjustments
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $170,000. The project will produce 1,000 cases of mineral water per year indefinitely. The current sales price is $149 per case, and the current cost per case is $104. The firm is taxed at a rate of 40%. Both prices and costs are expected to rise at a rate of 7% per year. The firm uses only equity, and it has a cost of capital of 16%. Assume that cash flows consist only of after-tax profits, because the spring has an indefinite life and will not be depreciated.
- What is the NPV of the project? Do not round intermediate steps. Round your answer to the nearest hundred dollars. (Hint:The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.)
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