1) Your CEO has asked you to evaluate whether the firm should launch a new product....

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Finance

1) Your CEO has asked you to evaluate whether the firm shouldlaunch a new product. Information provided by the consultant is asfollows:
$20,000 has been spent on doing a market survey, and this costhas been incurred regardless of whether the project is done ornot
Initial investment: $120,000 composed of $50,000 for the plantand $70,000 net working capital (NWC)
Profits of $32,000 every year for 3 years after which theproject ends and NWC is recovered; no salvage value for theplant
For a discount rate of 9%, what is the NPV?
2) You are analyzing the prospects of installing cost savingmachinery. You have the following information:
The machinery will cost $72,000 and will be depreciatedstraight line (equal amounts) over 4 years
The machinery will save $32,000 a year
The machinery will occupy space that would otherwise have beenrented for $10,000 a year (before taxes deducted)
The tax rate is 40%
Hint:
First calculate the net increase in income to be taxed takinginto account savings, depreciation and opportunity cost of rentablespace. What will be the increase in taxes per year from installingthe machinery? (Your answer should be a positive number.)
3) On a yearly basis the machinery generated a savings of$38,000 which led to an increase in taxes of $4,400. The space usedby the machinery was lost, leading to loss of rent (post tax) of$8,000.
Hint:
Here you don't need to know Depreciation (which is needed forcalculating taxes) or the tax rate. You are told what the taxesare.
What will be the net increase in cash flows per year frominstalling the machinery?

Answer & Explanation Solved by verified expert

3.6 Ratings (372 Votes)

Question 1 The NPV can be calculated with the use of following formula NPV Initial Investment Cash Flow Year 11Discount Rate1 Cash Flow Year 21Discount Rate2 Cash Flow Year 31Discount See Answer

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1) Your CEO has asked you to evaluate whether the firm shouldlaunch a new product. Information provided by the consultant is asfollows:$20,000 has been spent on doing a market survey, and this costhas been incurred regardless of whether the project is done ornotInitial investment: $120,000 composed of $50,000 for the plantand $70,000 net working capital (NWC)Profits of $32,000 every year for 3 years after which theproject ends and NWC is recovered; no salvage value for theplantFor a discount rate of 9%, what is the NPV?2) You are analyzing the prospects of installing cost savingmachinery. You have the following information:The machinery will cost $72,000 and will be depreciatedstraight line (equal amounts) over 4 yearsThe machinery will save $32,000 a yearThe machinery will occupy space that would otherwise have beenrented for $10,000 a year (before taxes deducted)The tax rate is 40%Hint:First calculate the net increase in income to be taxed takinginto account savings, depreciation and opportunity cost of rentablespace. What will be the increase in taxes per year from installingthe machinery? (Your answer should be a positive number.)3) On a yearly basis the machinery generated a savings of$38,000 which led to an increase in taxes of $4,400. The space usedby the machinery was lost, leading to loss of rent (post tax) of$8,000.Hint:Here you don't need to know Depreciation (which is needed forcalculating taxes) or the tax rate. You are told what the taxesare.What will be the net increase in cash flows per year frominstalling the machinery?