Reference no: EM131188250
Two years ago the Krusty Krab Restaurant purchased a grill for $50,000. The owner, Eugene Krabs, has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill. This new grill can be purchased for $60,000 and would be depreciated straight line over 8 years, after which it would have no salvage value. Eugene Krab expects that the new grill will produce EBITDA of $50,000 per year for the next eight years while the existing grill produces EBITDA of only $35,000 per year. The current grill is being depreciated straight line over its useful life of 10 years after which it will have no salvage value. All other operating expenses are identical for both grills. The existing grill can be sold to another restaurant now for $30,000.
The Krusty Krab's tax rate is 30%.
a. The incremental free cash flow that the Krusty Krab will incur today (Year 0) if they elect to upgrade to the new grill is $....... (round to the nearest dollar,)
b. The incremental free cash flow that the Krusty Krab will incur in year 1 if they elect to upgrade to the new grill is $...... (round to the nearest dollar)
c. If the Krusty Krab's opportunity cost of capital is 6%, then the NPV for upgrading to the new grill is $......... (round to the nearest dollar)
d. The IRR for upgrading to the new grill is............ %. (round to one decimal)
Hints
a. FCF (Year 0) = -CapEx_new_grill + SalePrice_old_grill - tax_rate*(GainOnSale)
where GainOnSsale=SalePrice_old_grill - BookValue_old_grill
b. Incremental EBITDA = EBITDA_new_grill - EBITDA_old_grill
c. Incremental Depreciation = Depreciation_new_grill - Depreciation_old_grill
d. Incremental FCFs (years 1 - 8) = (Incremental EBITDA - Incremental Depreciation) * (1 - tax rate) + Incremental Depreciation.
Compute the yield to maturity on the old issue
: Airborne Airlines Inc. has a $1,000 par value bond outstanding with 30 years to maturity. The bond carries an annual interest payment of $108 and is currently selling for $940. Airborne is in a 30 percent tax bracket. Compute the yield to maturity on..
|
Loan origination fee and compensating balance requirement
: You are considering borrowing 1 million SEK for one month at an APR of 12%. The bank will require a (no-interest) compensating balance of 2% of the face value of the loan and will charge a 4000 SEK loan origination fee. Which total amount you must bo..
|
All cash flows generated by the real estate
: Assume that the price of real estate is determined by P=PV(all cash flows generated by the real estate). After you have graduated you work for some years and can save some money. If discount rate is 1% lower than 3.5% what is the price of the house? ..
|
Zero-coupon bond with a yield to maturity
: Suppose you purchase a 30-year, SEK 10,000 par value, zero-coupon bond with a yield to maturity (YTM) of 4.4%. You hold the bond for 5 years before selling it. What is the price of the bond when you buy it? If the bond’s yield to maturity increases b..
|
The incremental free cash flow
: Two years ago the Krusty Krab Restaurant purchased a grill for $50,000. The owner, Eugene Krabs, has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill. The incremental free cash flow that the Krus..
|
Annual amount needed during retirement
: Jose, age 25, currently saves $7000 per year in his retirement account which is expected to earn 5% return. Jose is planning to retire at 62 and needs to fund his retirement upto age, 85. He has estimated that the annual amount needed during retireme..
|
Company plan to acquire to satisfy predicted demand
: A company manufactures a product using two machine cells. Each cell has a design capacity of 250 units per day and an effective capacity of 230 units per day. At present, actual output averages 200 units per cell, but the manager estimates that produ..
|
Loan processing operation that processes an average
: Determine the utilization and the efficiency for each of these situations: A loan processing operation that processes an average of 8 loans per day. The operation has a design capacity of 17 loans per day and an effective capacity of 15 loans per day..
|
Product life cycle analysis is very relevant to health care
: Product Life Cycle (PLC) analysis is very relevant to health care programs and services. Perhaps you have not previously have considered medical services as a “product,” but all the principles of Product Life Cycle do apply to our work in medicine, a..
|