Calculate the NPV using the adjusted present value method

Assignment Help Financial Management

Reference no: EM13877841

An automobile parts manufacturer is evaluating an investment in a new machining tool that could revolutionize its operations, cutting operating costs significantly. Operating costs would fall by $25,000 per year for 5 years. Purchase of the tool requires a $100,000 investment and the tool is in a CCA class with a rate of 10%. The tax rate for the firm is 32% and the required return on equity to the owners is now 16%.

The company is a small family-owned operation. Any debt financing that was used to establish the business was repaid more than 15 years ago. If purchased, the new tool will be financed with 75% debt and 25% equity. The debt is a loan with interest of 9% due at the end of every year. The loan requires level principal repayment over a period of 5 years, which is the estimated useful life of the new tool. It has no expected salvage value.

a) Calculate the NPV using the adjusted present value (APV) method

b) Calculate the NPV using the FTE method.

Reference no: EM13877841

Questions Cloud

Retirement-what is minimum expected annual return for stock : In order to fund her retirement, Michele requires a portfolio with an expected return of 0.10 per year over the next 30 years. She has decided to invest in Stocks 1, 2, and 3, with 25 percent in Stock 1, 50 percent in Stock 2, and 25 percent in Stock..

About the replicating portfolios : Replicating portfolios: Stock ABC is currently trading at $20. There is a 60% real-world probability that six months in the future the price will go up to $23. There is a 40% real-world probability that six months in the future the price will go down..

Stock purchase agreement between parties-recitals-convenants : Roger is preparing to buy all of the stock of FlyNet Inc., a successful C Corporation that is owned by five individuals. He knows that there are others in the wings ready to make an offer for the stock. He needs to move fast and he needs to be reason..

Taxes deducted from my paycheck : As an independent contractor (Form 1099), am I better off becoming a w2 employee and having State/SS taxes deducted from my paycheck? Or paying the taxes that do not get deducted out of my biweekly paychecks at the end of the year or specific paying ..

Calculate the NPV using the adjusted present value method : An automobile parts manufacturer is evaluating an investment in a new machining tool that could revolutionize its operations, cutting operating costs significantly. Operating costs would fall by $25,000 per year for 5 years. The company is a small fa..

If the adoption of a new product will reduce the sales : If the adoption of a new product will reduce the sales of an existing product, then the projected sales should: a) reflect only the sales of the new product b) include only the reduction amount. c) equal the incremental increase in total sales. d) be..

The dividends are expected to grow at constant rate : The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.56 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely. If investors require a 11 percent return on The Jackson-Timberlake War..

Considering expanding into another rural area : A local restaurant owner is considering expanding into another rural area. The expansion project will be financed through a line of credit with City Bank. The administrative costs of obtaining the line of credit are $500, and the interest payments ar..

Included in the initial outlay : Which of the following should be included in the initial outlay?

User Account

All Pages