Question 1:

Big-Pear Corp. is considering replacing its existing equipment that is used to produce smart cell phones. This existing equipment was purchase 3 years ago at a base price of $40,000. Installation costs at the time for the machine were $7,000. The existing equipment is considered a 5-year class for MACRS. The existing equipment can be sold today for $40,000 and for $30,000 in 3 years. The new equipment has a purchase price of $100,000 and is also considered a 5-year class for MACRS. Installation costs for the new equipment are $8,000. The estimated salvage value of the new equipment is $80,000. This new equipment is more efficient than the existing one and thus savings before taxes using the new equipment are $16,000 a year. Due to these savings, inventories will see a one time reduction of $3,000 at the time of replacement. The company's marginal tax rate is 30% and the cost of capital is 12%. For this project, what is the incremental cash flow in year 2?

Question 2 :

Use the following information to answer the 8 questions (filling in the blanks) that follow it. When answering the questions, DO NOT use dollar signs, USE commas to separate thousands, DO NOT use parenthesis to denote negative numbers, USE the negative sign and place it in front of first digit of your answer when your answer is a negative number. Round to the nearest dollar (do not enter decimals). For example, if your answer is -$1,245,300.40 then enter -1,245,300

RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $20 million a year. Variable costs are 80% of sales. The project is expected to last 10 years. Also, non-variable costs are $2,000,000 per year. The company has spent $3,000,000 in research and a marketing study that determined the company will lose (cannibalization) $4 million in sales a year of its existing low-priced stoves. The production variable cost of the existing low-priced stoves is $2 million a year.

The plant and equipment required for producing the new line of stoves costs $20,000,000 and will be depreciated down to zero over 20 years using straight-line depreciation. It is expected that the plant and equipment can be sold (salvage value) for $12,000,000 at the end of 10 years. The new stoves will also require today an increase in net working capital of $3,000,000 that will be returned at the end of the project.

The tax rate is 30 percent and the cost of capital is 10%.

1. What is the initial outlay (IO) for this project?

2. What is the annual Earnings before Interests, and Taxes (EBIT) for this project?

3. What is the annual net operating profits after taxes (NOPAT) for this project?

4. What is the annual incremental net cash flow (operating cash flow: OCF) for this project?

5. What is the remaining book value for the plant at equipment at the end of the project?

6. What is the cash flow due to tax on salvage value for this project? Enter a negative # if it is a tax gain. For example, if your answer is a tax on capital gains of $3,004.80 then enter -3,005 ; if your answer is a tax shelter from a capital loss of $1,000,20 then enter 1,000

7. What is the project's cash flow for year 10 for this project?

8. What is the Net Present Value (NPV) for this project?

MACRS Fixed Annual Expense Percentages by Recovery Class 15-Year Year 1 2 3 4 5 3-Year 33.33% 44.45% 14.81% 7.41% 5-Year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 7-Year 14.29% 24.49% 17.49% 12.49% 8.93% 8.93% 8.93% 4.45% 10-Year 10.00% 18.00% 14.40% 11.52% 9.22% 7.37% 6.55% 6.55% 6.56% 6.55% 3.28% 6 7 8 9 10 11 12 13 14 15 16 5.00% 9.50% 8.55% 7.70% 6.93% 6.23% 5.90% 5.90% 5.91% 5.90% 5.91% 5.90% 5.91% 5.90% 5.91% 2.95% For your answer, round to the nearest dollar, do not enter the $ sign, use commas to separate thousands, use a negative sign in front of first number is the cash flow is negative (do not use parenthesis to indicate negative cash flows). For example, if your answer is $3,005.87 then enter 3,006; if your answer is -$1,200.25 then enter -1,200 For this project, the incremental cash flow in year 2 is