The Target Copy Company is contemplating the

replacement of its oldprinting machine with a new model costing

$60,000. The old machine, which

originally cost $40,000, has 6 years of expected life remaining and a current

book value of $30,000 versus a current market value of $24,000. Target’s corporate tax rate is 40 percent. If

Target sells the old machine at market value, what is the initial after-tax

outlay for the new printing machine?

a. -$22,180

b. -$30,000

c. -$33,600

d. -$36,000

e. -$40,000

** **

[i]. Dandy

Product’s overall weighted average required rate of return is 10 percent. Its

yogurt division is riskier than average, its fresh produce division has average

risk, and its institutional foods division has below-average risk. Dandy

adjusts for both divisional and project risk by adding or subtracting 2

percentage points. Thus, the maximum adjustment is 4 percentage points. What is

the risk-adjusted required rate of return for a low-risk project in the yogurt

division?

a. 6%

b. 8%

c. 10%

d. 12%

e. 14%

*Medium:*

*[MACRS table required]*

** **

[ii]. Mars

Inc. is considering the purchase of a new machine which will reduce

manufacturing costs by $5,000 annually.

Mars will use the MACRS accelerated method to depreciate the machine,

and it expects to sell the machine at the end of its 5-year operating life for

$10,000. The firm expects to be able to

reduce net operating working capital by $15,000 when the machine is installed,

but required working capital will return to the original level when the machine

is sold after 5 years. Mars’s marginal

tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate

projects of this nature. If the machine

costs $60,000, what is the project’s NPV?

a. -$15,394

b. -$14,093

c. -$58,512

d. -$21,493

e. -$46,901

*[MACRS table required]*

** **

[iii]. Stanton

Inc. is considering the purchase of a new machine which will reduce

manufacturing costs by $5,000 annually and increase earnings before

depreciation and taxes by $6,000 annually.

Stanton

will use the MACRS method to depreciate the machine, and it expects to sell the

machine at the end of its 5-year operating life for $10,000 before taxes. Stanton’s

marginal tax rate is 40 percent, and it uses a 9 percent cost of capital to

evaluate projects of this type. If the

machine’s cost is $40,000, what is the project’s NPV?

a. $1,014

b. $2,292

c. $7,550

d. $ 817

e. $5,040

[iv]. Parker Products

manufactures a variety of household products. The company is considering

introducing a new detergent. The

company’s CFO has collected the following information about the proposed

product. (Note: You may or may not need

to use all of this information, use only the information that is relevant.)

·

The project has an anticipated

economic life of 4 years.

·

The company will have to

purchase a new machine to produce the detergent. The machine has an up-front cost (t = 0) of

$2 million. The machine will be depreciated on a straight-line basis over 4

years (that is, the company’s depreciation expense will be $500,000 in each of

the first four years (t = 1, 2, 3, and 4).

The company anticipates that the machine will last for four years, and

that after four years, its salvage value will equal zero.

·

If the company goes ahead with

the proposed product, it will have an effect on the company’s net operating

working capital. At the outset, t = 0,

inventory will increase by $140,000 and accounts payable will increase by

$40,000. At t = 4, the net operating

working capital will be recovered after the project is completed.

·

The detergent is expected to

generate sales revenue of $1 million the first year (t = 1), $2 million the

second year (t = 2), $2 million the third year (t = 3), and $1 million the

final year (t = 4). Each year the

operating costs (not including depreciation) are expected to equal 50 percent

of sales revenue.

·

The company’s interest expense

each year will be $100,000.

·

The new detergent is expected

to reduce the after-tax cash flows of the company’s existing products by

$250,000 a year (t = 1, 2, 3, and 4).

·

The company’s overall WACC is

10 percent. However, the proposed

project is riskier than the average project for Parker; the project’s WACC is

estimated to be 12 percent.

·

The company’s tax rate is 40

percent.

What is the net present

value of the proposed project?

a.

-$ 765,903.97

b. -$1,006,659.58

c. -$

824,418.62

d. -$

838,997.89

e. -$

778,583.43

** **

[v]. Virus

Stopper Inc., a supplier of computer safeguard systems, uses a cost of capital

of 12 percent to evaluate average-risk projects, and it adds or subtracts 2

percentage points to evaluate projects of more or less risk. Currently, two

mutually exclusive projects are under consideration. Both have a cost of

$200,000 and will last 4 years. Project A, a riskier-than-average project, will

produce annual end of year cash flows of $71,104. Project B, of less than

average risk, will produce cash flows of $146,411 at the end of Years 3 and 4

only. Virus Stopper should accept

a. B

with a NPV of $10,001.

b. Both

A and B because both have NPVs greater than zero.

c. B

with a NPV of $8,042.

d. A

with a NPV of $7,177.

e. A

with a NPV of $15,968.

%.