FINANCE-Business Finance Fall 2015

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
A

PROJECT
B

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

 

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