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Principles Of Managerial Finance 15th Global Edition Chad J. Zutter, Scott Smart - Solutions
=+b. The asset is sold for $650,000.c. The asset is sold for $101,244.d. The asset is sold for $92,244.
=+LG 3 P11–10 Change in net working capital calculation MSF Manufacturing is considering the purchase of a new machine to improve its production efficiency. The company has total current assets of $865,000 and total current liabilities of $673,000. As a result of the proposed replacement, the
=+a. Using the information given, calculate any change in net working capital that is expected to result from the proposed replacement plan.
=+b. Explain why a change in these current accounts would be relevant in determining the initial investment for the proposed capital expenditure.
=+c. Would the change in net working capital enter into any of the other cash flow components that make up the project’s relevant cash flows? Explain.
=+LG 3 LG 4 P11–11 Calculating initial investment Miller Dental Inc. is considering replacing its laser checking system, which was purchased 3 years ago at a cost of $568,000. The system can be sold today for $253,000. It is being depreciated using MACRS and a 5-year recovery period (see Table
=+a. Calculate the book value of the existing laser checking system.
=+b. Calculate the after-tax proceeds of its sale for $253,000.
=+c. Calculate the initial investment associated with the replacement project.
=+P11–12 Initial investment: Basic calculation Sony Pacific Music Corporation is considering the purchase of a new sound board, used in recording studios to improve sound effects. The existing sound board was purchased 3 years ago at an installed cost of $23,500; it was being depreciated under
=+LG 3 LG 4 P11–13 Initial investment at various sale prices Novartis International AG is considering replacing one labeling system with a new model. The old system was purchased 2 years ago for an installed cost of CHf 500,000. The firm is depreciating the labeling system using a straight line
=+a. Novartis sells the old labeling system for CHf 400,000.b. Novartis sells the old labeling system for CHf 300,000.c. Novartis sells the old labeling system for CHf 200,000.d. Novartis sells the old labeling system for CHf 100,000.
=+LG 3 LG 4 P11–14 Calculating initial investment DuPree Coffee Roasters Inc. wishes to expand and modernize its facilities. The installed cost of a proposed computer-controlled automatic-feed roaster will be $130,000. The firm has a chance to sell its 4-year-old roaster for $35,000. The
=+a. What is the book value of the existing roaster?
=+b. Calculate the after-tax proceeds of the sale of the existing roaster.
=+c. Calculate the change in net working capital using the figures in the following table.
=+d. Calculate the initial investment associated with the new roaster.
=+LG 5 P11–15 Depreciation Tasty Bakery Corporation is evaluating the acquisition of a baking machine that costs $72,000 and requires $3,000 in installation costs. If the corporation depreciates the machine under MACRS, using a 5-year recovery period(see Table 4.2 for the applicable depreciation
=+P11–16 Operating cash inflows A partnership is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is$1.9 million plus $100,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year
=+a. What incremental earnings before interest, taxes, depreciation, and amortization will result from the renewal?
=+b. What incremental net operating profits after taxes will result from the renewal?
=+c. What operating cash flows will result from the renewal?Personal Finance Problem
=+LG 5 P11–17 Operating cash flows Michele operates a local tourist agency. He has been using an Olivetti personal computer (PC) for several years and believes it is time to buy a new one. He would like to know the operating cash flows associated with the replacement of the old PC. The following
=+LG 5 P11–18 Operating cash flows: Expense reduction Biophore Corporation, an Indian pharmaceutical company, is considering replacing a labeling machine in one of its factories. The replacement will reduce operating expenses (i.e., increase earnings before interest, taxes, depreciation, and
=+P11–19 Operating cash flows Hoffmann-La Roche is considering replacing one permeability test equipment with a new model. The old equipment is fully depreciated and would last 3 more years. The new equipment is expected to have a 5-year life and depreciation charges of CHf 20,000 in year 1; CHf
=+a. Calculate the operating cash flows associated with each equipment.
=+b. Calculate the operating cash flows resulting from the proposed equipment replacement.
=+c. Depict on a timeline the operating cash flows calculated in part b.
=+LG 5 P11–20 Operating cash inflows MSC Cruises provides cruise lines for tourist destinations all around the world. It is considering replacing 1 of its cruise ships with a new model.The existing cruise ship was bought 5 years ago at a total cost of €250,000,000 and is being depreciated using
=+P11–21 Terminal cash flow: Various lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs $160,000 and requires $20,000 in installation costs. Net working capital will increase immediately by $30,000, but those funds will be recovered at the end
=+a. Calculate the terminal cash flow for a usable life of (1) 3 years, (2) 5 years, and(3) 7 years.
=+b. Discuss the effect of usable life on terminal cash flows, using your findings in part a.
=+c. Assuming a 5-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $9,000 or (2) $170,000 (before taxes) at the end of 5 years.
=+d. Discuss the effect of sale price on terminal cash flow, using your findings in part c.
=+LG 6 P11–22 Terminal cash flow: Replacement decision Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $200,000 and will require $30,000 in installation costs.
=+LG 3 LG 4 P11–23 Net cash flows for a marketing campaign Barilla Group, a manufacturer of pasta and other similar food products, has maintained stable sales and profits over the last few years. Although the market for pasta and similar products has been expanding by 5% per year, Barilla has
=+P11–24 Net cash flows: No terminal value Central Laundry is replacing an existing piece of machinery with a new model. The old machine was purchased 3 years ago for$50,000 and was being depreciated under MACRS, using a 5-year recovery period.The machine has 5 years of usable life remaining. The
=+a. Calculate the initial investment associated with replacement of the old machine by the new one.
=+b. Determine the operating cash flows associated with the proposed replacement.(Note: Be sure to consider the depreciation in year 6.)
=+c. Depict on a timeline the net cash flows found in parts a and b associated with the proposed replacement decision.)
=+d. How would your answers change if the new machine is eligible for 100% bonus depreciation?
=+a. Calculate the initial investment associated with the replacement of the existing line by the new one.
=+b. Determine the operating cash flows associated with the proposed line replacement.
=+c. Determine the terminal cash flow expected at the end of year 5 from the proposed line replacement.
=+d. Depict on a timeline the incremental cash flows associated with the proposed line replacement decision.Personal Finance Problem
=+LG 3 LG 4 P11–26 Determining net cash flows for a new car Antonio and his wife Alessia are considering the purchase of a new car and have decided that estimating its cash flows will help them in their decision process. They expect to have a disposable annual income of €18,000. Their cash
=+a. The initial investmentb. Operating cash flowc. Terminal cash flowd. Summary of annual cash flowe. Based on their disposable annual income, what advice would you give Antonio and Alessia regarding the proposed car purchase?
=+P11–27 Integrative: Determining net cash flows Refer to P11-25. Suppose that Pirelli is considering an alternative rubber extrusion line, which is less expensive (it costs€800,000 and does not have any additional installation costs), but at the same time requires an increase in accounts
=+a. Calculate the initial investment associated with the alternative line.
=+b. Determine the incremental operating cash flows associated with the alternative line replacement.
=+c. Determine the terminal cash flow expected at the end of year 5 from the alternative line replacement.
=+d. Depict on a timeline the incremental cash flows associated with the alternative line replacement decision.
=+LG 1 LG 2 P11–28 Integrative: Complete investment decision Due to an increase in copper prices to MNT 7,744 per pound (MNT stands for Tughrik, the official currency of Mongolia), Tian Poh Resources, a Singapore-based company with coal and copper assets in Mongolia, is thinking about reopening
=+a. Calculate the operating cash flows for the copper mine project.
=+b. Depict on a timeline the net cash flows for the copper mine project.
=+c. Calculate the internal rate of return (IRR) for the copper mine project.
=+d. Calculate the net present value (NPV) for the copper mine project.
=+e. Make a recommendation to accept or reject the copper mine project, and justify your answer.
=+P11–29 Integrative: Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.2 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1 million
=+a. Determine the initial investment required by the new press.
=+b. Determine the operating cash flows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.)
=+c. Determine the payback period.
=+d. Determine the net present value (NPV) and the internal rate of return (IRR)related to the proposed new press.e. Make a recommendation to accept or reject the new press, and justify your answer.
=+LG 1 LG 2 P11–30 Integrative: Investment decision Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1,200,000 and requires installation costs of $150,000. The existing machine can be sold currently for $185,000 before taxes. It is 2 years
=+a. Develop the net cash flows needed to analyze the proposed replacement.
=+b. Determine the net present value (NPV) of the proposal.
=+c. Determine the internal rate of return (IRR) of the proposal.
=+d. Make a recommendation to accept or reject the replacement proposal, and justify your answer.
=+e. What is the highest cost of capital that the firm could have and still accept the proposal? Explain.
=+LG 2 P11–31 ETHICS PROBLEM Cash flow projections are a central component to the analysis of new investment ideas. In most firms, the person responsible for making these projections is not the same person who generated the investment idea in the first place. Why?
=+a. Create a spreadsheet to calculate the initial investment.
=+b. Create a spreadsheet to prepare a depreciation schedule for both the new and the old machine. Both machines are depreciated under MACRS, using a 5-year recovery period. Remember that the old machine has only 3 years of depreciation remaining.
=+c. Create a spreadsheet to calculate the operating cash flows for Damon Corporation for both the new and the old machine.
=+d. Create a spreadsheet to calculate the terminal cash flow associated with the project.
=+e. Repeat all of the calculations above assuming that the new machine qualifies for 100% bonus depreciation.
=+9–10 What premise about share value underlies the constant-growth valuation (Gordon growth) model that we use to measure the cost of common stock equity, rs?
=+ST9–1 Individual financing costs and WACC Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the 21% tax bracket. The company’s financial analysts have gathered the following data:Debt The firm can raise debt by selling $1,000-par-value, 10% coupon
=+a. Calculate the individual cost of each source of financing. (Round to the nearest 0.1%.)
=+b. Calculate the firm’s weighted average cost of capital (WACC) using the weights shown in the following table, which are based on the firm’s target capital structure proportions. (Round to the nearest 0.1%.)
=+c. In which, if any, of the investments shown in the following table do you recommend that the firm invest? Explain your answer. How much new financing is required?
=+LG 4 E9–2 People’s Consulting Group has been asked to consult on a potential preferred stock offering by Brave New World. This 9% preferred stock issue would be sold at its par value of $55 per share. Flotation costs would total $3 per share. Calculate the cost of this preferred stock.
=+LG 5 E9–3 Belle Fashions supplies garments to high street retailers. They have been paying dividends steadily for 10 years. During that time, dividends have grown at a compound annual rate of 5%. If Belle Fashions’s current stock price is £5.80 and the firm plans to pay a dividend of £0.70
=+P9–1 Concept of cost of capital and WACC Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South.The basic variables surrounding each project
=+a. An analyst evaluating the North facility expects that the project will be financed by debt that costs the firm 7%. What recommendation do you think this analyst will make regarding the investment opportunity?
=+b. Another analyst assigned to study the South facility believes that funding for that project will come from the firm’s retained earnings at a cost of 16%. What recommendation do you expect this analyst to make regarding the investment?
=+c. Explain why the decisions in parts a and b may not be in the best interests of the firm’s investors.
=+d. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost of capital (WACC) using the data in the table.
=+e. If both analysts had used the WACC calculated in partd, what recommendations would they have made regarding the North and South facilities?
=+f. Compare and contrast the analyst’s initial recommendations with your findings in parte. Which decision method seems more appropriate? Explain why.
=+P9–2 Cost of debt using both methods Currently, Jackson Real Estate Inc. can sell 10-year, $100-par-value bonds paying annual interest at a 6% coupon rate. Jackson can sell its bonds for $106.20 each. Jackson will incur flotation costs of $2.50 per bond in this process. The firm is in the 25%
=+a. Find the net proceeds from sale of the bond, Nd.
=+b. Show the cash flow from the firm’s point of view over the maturity of the bond.
=+c. Calculate the before-tax and after-tax costs of debt.
=+d. Use the approximation formula to estimate the before-tax and after-tax costs of debt.
=+e. Compare the costs of debt calculated in parts c andd. Which approach do you prefer? Why?Personal Finance Problem
=+LG 3 P9–3 Before-tax cost of debt and after-tax cost of debt Jim Paige is opening his own restaurant, and he is taking out a 10-year mortgage. Jim will borrow $400,000 from a bank, and to repay the loan he will make 120 monthly payments (principal and interest) of $4,420.82 per month over the
=+a. What is the before-tax interest rate (per year) on Jim’s loan?
=+b. What is the after-tax interest rate that Jim is paying?
=+LG 3 P9–4 Cost of debt using the approximation formula For each of the following $1,000-parvalue bonds, assuming annual interest payment and a 21% tax rate, calculate the after-tax cost to maturity, using the approximation formula.
=+P9–5 The cost of debt Gronseth Drywall Systems Inc. is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose
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