Mike Mulligan wants to expand his heavy equipment business into excavation. He plans to buy aused excavator for $300,000. The excavator requires an inventory of spare parts worth $10,000. These investments will occur immediately. Mulligan will operate the excavationbusiness for two years and expects EBITDA of $200,000 at the end of each year. He will closehis business at the end of the second year, sell the equipment for $100,000 and liquidate theinventory of spare parts. Mulligan pays a tax rate of 25%. Using this information, compute theappropriate values for operating cash flow, investments in net working capital, CAPEX and freecash flow for each year of the project.

Initial Investments (Year 0):Purchase of excavator: -$300,000Inventory of spare parts: -$10,000Total…

Answered: Mike Mulligan wants to expand his heavy…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

See similar textbooks

Similar questions

Concord Pacific is considering purchasing a small residential building in Abbotsford that will cost $1,700,000 and will require $120,000 in renovations immediately. Revenue from rent is estimated to be $500,000 a year. Expenses are estimated to be $200,000 a year. They plant to keep the building for 6 years and estimates they will be able to sell the building for $2,200,000 at the end of 6 years. Assume expenses occur at the beginning of the year and revenue at the end of the year. Concord wants to earn at least 18% per year. Concord has calculated the NPV of this project is -$81,683.54. To encourage businesses to invest, the provincial government is considering giving Concord a one-time tax credit payable at the end of 2 years. How large of a tax credit does Concord require if they want to earn at a minimum of 18% per year?
RKE & Associates is considering the purchase of a building it currently leases for $30,000 per year. The owner of the building put it up for sale at a price of $180,000, but because the firm has been a good tenant, the owner offered to sell it to RKE for a cash price of $160,000 now. If purchased now, how long will it be before the company recovers its investment at an interest rate of 15.00% per year? Solve by using the NPER function. The company will recover its investment in years.
BECE Developments is considering purchasing a small commercial building located in Prince George that will cost $800,000 and will require $125,000 in renovations immediately. Revenue from rent is estimated to be $200,000 a year. Expenses are estimated to be $50,000 a year. The company plans to keep the building for 6 years and estimates they will be able to sell the building for 25% more than the original purchase price. BECE wants to earn at least 20%. Assume expenses occur at the beginning of the year and revenue at the end of the year. What is the IRR? Question 5 options: IRR=16.24%, earn possitive return, yes, invest IRR=16.24%, less than required 20%, not invest IRR=-8.15%, earn negative return, not invest IRR=16.06%, earn possitive return, yes, invest
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $395,000, to be paid immediately. Bill expects aftertax cash inflows of $86,000 annually for six years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 11 percent. What is the project’s profitability index (PI)? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)
Your company is about to undertake a major investment project. The project will require an initial investment of $200 million in a machine plus another $35 million for working capital. Tax authorities will allow you to depreciate the machine on a straight-line basis over four years to a salvage value of zero. In fact, however, you expect that you can sell the machine for $30 million at the end of Year 4. You will need to have a working capital balance on hand at the end of each year equal to 30% of that year’s sales. The working capital can be fully recovered at the end of the project’s life. You expect that the project will generate $100 million in sales and $40 million in cash operating expenses (excluding depreciation) during each of the next four years. The corporate tax rate is 40%. The discount rate is 7.25%. What is NPV of this project?
RKE & Associates is considering the purchase of a building it currently leases for $30,000 per year. The owner of the building put it up for sale at a price of $170,000, but because the firm has been a good tenant, the owner offered to sell it to RKE for a cash price of $160,000 now. If purchased now, how long will it be before the company recovers its investment at an interest rate of 15% per year?
Freal is a commercial real estate developer. It is interested in acquiring a land to build a shopping centre. The cost associated with land acquisition and construction is estimated to be $60 million. There are two options available to Freal: Lease option where the company sells the property in year 1 and leaseback for two more years; Sale option where the company sells the property at the end of year 3. The cash flows for the lease and the sale option are: Year Lease ($ million) Sale ($ million) 1 60 10 2 10 10 3 10 75 a. Assume a required rate of return of ten per cent per annum. Calculate both NPV and IRR for the Lease option & the Sale option. Which is the preferred option? b. The directors of Freal would like to know the incremental IRR to help them with the decision. Calculate the incremental IRR, and explain which option should you choose based on the incremental IRR. Assume that with the addition of an outlay of $1 million at year…
Barbara Thompson is considering the purchase of a piece of business rental property containing stores and offices at a cost of $350,000. Barbara estimates that annual receipts from rentals will be $55,000 and that annual disbursement. other than income taxes will be about $18,000. The property is expected to appreciate at the annual rate of 5%. Barbara expects to retain the property for 20 years once it is acquired. Then it will be depreciated on the basis of the 39-year real-property class (MACRS), assuming that the property would be placed in service on January 1.Barbara's marginal tax rate is 30%, and her MARR is 10%. What would be the minimum annual total of rental receipts that would make the investment break-even'?
A small strip mining cola company is trying to decide whether it should purchase or lease a new clamshell. If purchased, the shell will cost $150,000 and is expected to have a $65,000 salvage value after 6 years. Alternatively, the company can lease a clamshell for $20,000 per year, but the lease payment will have to be made at the beginning of each year. If the clamshell is purchased, it will be leased to other strip-mining companies whenever possible, an activity that is expected to yield revenue of $12,000 per year. If the company’s MARR is 15% per year, should the clamshell be purchased or leased on the basis of future worth analysis. (Enter the FW value of the selected alternative with proper positive or negative sign)
Mars Inc. is considering a 5-year project that requires a new machine that costs $51,000, and an additional net working capital of $3,000, which will be recovered when the project ends in 5 years. This project would increase the firm's revenues by $24,000 per year and its operating costs by $11,000 per year. Mars will use the 3-year MACRS to depreciate the machine, and it expects to sell the machine at the end of the project for $20,000. The firm's marginal tax rate is 29 percent, and the project's cost of capital is 14 percent. What is the net cash flow at year 5, the final year? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively. Question 14 options: $26,430 $26,890 $27,370 $27,890 $28,310 $28,870
Freal is a commercial real estate developer. It is interested in acquiring a land to build a shopping centre. The cost associated with land acquisition and construction is estimated to be $70 million. There are two options available to Freal: Lease option where the company sells the property in year 1 and leaseback for two more years; Sale option where the company sells the property at the end of year 3. The cash flows for the lease and the sale option are: Year Lease ($ million) Sale ($ million) 1 65 10 2 11 10 3 11 85 Assume a required rate of return of ten per cent per annum. Calculate both NPV and IRR forthe Lease option & the Sale option. Which is the preferred option? The directors of Freal would like to know the incremental IRR to help them with the decision. Calculate the incremental IRR, and explain which option should you choose based on the incremental IRR. Assume that with the addition of an outlay of $1 million at year 3, the…
Crane Lumber, Inc., is considering purchasing a new wood saw that costs $75,000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $4,400 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Crane’s tax rate is 34 percent, and its opportunity cost of capital is 10.50 percent.- What is the project's NPV? - The copmany should (buy/not buy) the machine?

SEE MORE QUESTIONS

Recommended textbooks for you

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

SEE MORE TEXTBOOKS