Reference no: EM133502573

Problem 1: You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $80 initially, and then $125 per year in maintenance costs. Machine B costs $150 initially, has a life of three years, and requires $100 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 12 percent, and the tax rate is zero.

Problem 2: You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS three-year class, is not eligible for either bonus depreciation or Section 179 expensing and will be sold after three years for $20,000. Use of the truck will require an increase in NWC (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the cash flows for this project be? (Prepare a schedule that includes subtotals for EBIT, net income, OCF, and Free Cash Flows.)

Problem 3: A company is considering the purchase of new equipment with a cost of $425,000. It will be eligible for 100 percent bonus depreciation. The equipment can be sold for $45,000 at the end of the project in 5 years. Sales would be $275,000 per year, with annual fixed costs of $47,000 and variable costs equal to 35% of sales. The project would require an investment of $25,000 in NWC that would be returned at the end of the project. The tax rate is 21 percent, and the cost of capital is 9 percent. What is the project's NPV? (In addition to NPV, you need to submit a schedule that includes subtotals for EBIT, net income, OCF, and Free Cash Flows.)

Problem 4: Nana's Bakery is considering the purchase of a bigger oven. The original cost of the old oven was $37,000; it is now five years old, and it has a current market value of $16,000. The old oven is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $18,500 and an annual depreciation expense of $3,700. The old oven can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new oven whose cost is $26,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new oven are $4,100 a year over its full MACRS depreciable life. Depreciation is computed using MACRS five-year life. Assume a 21 percent tax rate. What will the cash flows for this project be? (Prepare a schedule that includes subtotals for EBIT, net income, OCF and Free Cash Flows.)