Reference no: EM132893721

Questions -

Question 1: Daily Enterprises is purchasing a $10.5 million machine. It will cost $53,000 to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value. Assume that CCA deductions are the same as depreciation expenses. The machine will generate incremental revenues of $3.8 million per year along with incremental costs of $1.3 million per year. If? Daily's marginal tax rate is 35%?, what are the incremental earnings associated with the new? machine?

a) The annual incremental earnings are ?$_________?

Question 2: Pisa? Pizza, a seller of frozen? pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $25 million per year. While many of these sales will be to new? customers, Pisa Pizza estimates that 35% will come from customers who switch to the? new, healthier pizza instead of buying the original version.

a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new? pizza?

b. Suppose that 56% of the customers who will switch from Pisa? Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this? case?

Question 3: Daily Enterprises is purchasing a $9.7 million machine. It will cost $52,000 to transport and install the machine. The machine has a depreciable life of five years using? straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.1 million per year along with incremental costs of $1.5 million per year.? Daily's marginal tax rate is 21%. You are forecasting incremental free cash flows for Daily Enterprises. What are the incremental free cash flows associated with the new? machine?

Question 4: One year? ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $160,000 today. The CCA rate applicable to both machines is 40%?; neither machine will have any? long-term salvage value. You expect that the new machine will produce earnings before? interest, taxes,? depreciation, and amortization? (EBITDA) of $55,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $24,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your? company's tax rate is 42%?, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace its? year-old machine?

Question 5: Big Rock Brewery currently rents a bottling machine for $51,000 per? year, including all maintenance expenses. The company is considering purchasing a machine instead and is comparing two alternate? options: option a is to purchase the machine it is currently renting for $155,000?, which will require $20,000 per year in ongoing maintenance? expenses, or option? b, which is to purchase a? new, more advanced machine for $250,000?, which will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year.? Also, $35,000 will be spent upfront in training the new operators of the machine. Suppose the appropriate discount rate is 7% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each? year, as is the rental of the machine. Assume also that the machines are subject to a CCA rate of 25% and there will be a negligible salvage value in 10? years' time? (the end of each? machine's life). The marginal corporate tax rate is 40%. Should Big Rock Brewery continue to? rent, purchase its current? machine, or purchase the advanced? machine? To make this? decision, calculate the NPV of the FCF associated with each alternative.? (Note: the NPV will be? negative, and represents the PV of the costs of the machine in each? case.)

Question 6: Spherical Manufacturing recently spent $10 million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of 25% and? Spherical's marginal corporate tax rate is 39%.

a. What are the annual CCA deductions associated with this equipment for the first five? years?

b. What are the annual CCA tax shields for the first five? years?

c. What is the present value of the first five CCA tax shields if the appropriate discount rate is 12% per? year?

d. What is the present value of all the CCA tax shields assuming the equiment is never sold and the appropriate discount rate is 12% per? year?

e. How might your answer to part? (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five? years?