Question Details

Foley Systems is considering a new investment 


1.	Clemson Software is considering a new project whose data are shown below.  The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years.  Revenues and other operating costs are expected to be constant over the project's 3-year life.  What is the project's Year 1 cash flow?
Equipment cost (depreciable basis)	$65,000
Straight-line depreciation rate	33.333%
Sales revenues, each year	$60,000
Operating costs (excl. deprec.)	$25,000
Tax rate	35.0%
a.	$28,115
b.	$28,836
c.	$29,575
d.	$30,333
e.	$31,092
2.	Temple Corp. is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value.  No new working capital would be required.  Revenues and other operating costs are expected to be constant over the project's 3-year life.  What is the project's NPV?
Risk-adjusted WACC	10.0%
Net investment cost (depreciable basis)	$65,000
Straight-line deprec. rate	33.3333%
Sales revenues, each year	$65,500
Operating costs (excl. deprec.), each year	$25,000
Tax rate	35.0%
a.	$15,740
b.	$16,569
c.	$17,441
d.	$18,359
e.	$19,325
3.	Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed.  The machine has a tax life of 5 years, and it can be depreciated according to the following rates.  The firm expects to operate the machine for 4 years and then to sell it for $12,500.  If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4? 
	Year	Depreciation Rate
	1	0.20
	2	0.32
	3	0.19
	4	0.12
	5	0.11
	6	0.06
a.	$8,878
b.	$9,345
c.	$9,837
d.	$10,355
e.	$10,900
4.	Foley Systems is considering a new investment whose data are shown below.  The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project's life.  Revenues and other operating costs are expected to be constant over the project's life.  What is the project's NPV?  (Hint: Cash flows are constant in Years 1 to 3.) 
WACC	10.0%
Net investment in fixed assets (basis)	$75,000
Required new working capital	$15,000
Straight-line deprec. rate	33.333%
Sales revenues, each year	$75,000
Operating costs (excl. deprec.), each year	$25,000
Tax rate	35.0%
a.	$23,852
b.	$25,045
c.	$26,297
d.	$27,612
e.	$28,993




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