Reference no: EM13867643
1. A Yellow Pages directory company must decide whether it should compose the ads for its clients inhouse or pay a production company to compose them. To develop the ads inhouse, the company will have to purchase computers, printers, and other peripherals at a cost of $12,000. The equipment will have a useful life of 3 years, after which it will be sold for $2000. The employee who creates the ads will be paid $45,000 per year. In addition, each ad will have an average cost of $8 to prepare for delivery to the printer. A total of 4000 ads are anticipated for the next few years. Alternatively, the company can outsource ad development at a fee of $20 per ad regardless of the quantity. The current interest rate is 8% per year. What is the breakeven amount, and which alternative is economically better?
2. As an innovative way to pay for various software packages, a new hightechnology service company has offered to pay your company in one of three ways: (1) pay $400,000 now, (2) pay $1.1 million 5 years from now, or (3) pay an amount of money 5 years from now that has the same buying power as $750,000 now. If you want to earn a real interest rate of 10% per year and the inflation rate is 6% per year, which offer should you accept?
3. A division of Hanes has the following data at the end of a year.
Total revenue is $48 million. Depreciation is $8.2 million. Operating expenses is $28 million For an effective federal tax rate of 35% and state tax rate of 6.5%, determine
(a) CFAT, (b) percentage of total revenue expended on taxes, and (c) net income for the year.
4. The chief engineer of Domingo County is considering two methods for lining waterholding tanks. Abituminous coating can be applied at a cost of $8000. If the coating is touched up after 3 years at a cost of $1000, its life can be extended another 3 years. As an alternative, a plastic lining may be installed with a useful life of 15 years. If the discount rate is 4% per year, how much can be spent for the plastic lining so that the two methods just break even?
5. The independent project estimates below have been developed by the engineering and finance managers. The corporate MARR is 15% per year, and the capital investment limit is $4 million. Use the PW method and Solver to select the economically best projects.
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Project
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Project Cost, $ Millions
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Life, Years
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NCF, $/year
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1
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-1.5
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8
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360,000
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2
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-3.0
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10
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600,000
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3
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-1.8
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5
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520,000
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4
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-2.0
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4
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820,000
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: Alternatively, the company can outsource ad development at a fee of $20 per ad regardless of the quantity. The current interest rate is 8% per year. What is the breakeven amount, and which alternative is economically better?
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