BUSI 320 connect homework 6 solutions complete answers

BUSI 320 connect homework 6 solutions complete answers 

 

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Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment will be made. The Australian gold mine will cost $1,630,000 and will produce $361,000 per year in years 5 through 15 and $555,000 per year in years 16 through 25. The U.S. gold mine will cost $2,020,000 and will produce $258,000 per year for the next 25 years. The cost of capital is 10 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. (Note: In looking up present value factors for this problem, you need to work with the concept of a deferred annuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years; the returns in years 16 through 25 represent 10 years.)

 

Debby’s Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of its aerobics dancing. The equipment will cost $24,300. Debby is not sure how many members the new equipment will attract, but she estimates that her increased annual cash flows for each of the next five years will have the following probability distribution. Debby’s cost of capital is 10 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods.

 

Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 9 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 13 percent. Either method will require an initial capital outlay of $105,000. The inflows from projected business over the next five years are shown next.  

 

Waste Industries is evaluating a $59,100 project with the following cash flows. 

 

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $78,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $34,800. A new piece of equipment will cost $230,000. It also falls into the five-year category for MACRS depreciation. Assume the new equipment would provide the following stream of added cost savings for the next six years. Use Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

DataPoint Engineering is considering the purchase of a new piece of equipment for $255,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $250,000 in nondepreciable working capital. $82,000 of this investment will be recovered after the sixth year and will provide additional cash flow for that year. Income before depreciation and taxes for the next six are shown in the following table. Use Table 12–11, Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

An asset was purchased three years ago for $150,000. It falls into the five-year category for MACRS depreciation. The firm is in a 25 percent tax bracket. Use Table 12–12.

 

The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $160,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12.

 

Telstar Communications is going to purchase an asset for $780,000 that will produce $380,000 per year for the next four years in earnings before depreciation and taxes. The asset will be depreciated using the three-year MACRS depreciation schedule in Table 12–12. (This represents four years of depreciation based on the half-year convention.) The firm is in a 25 percent tax bracket.

 

Turner Video will invest $98,500 in a project. The firm’s cost of capital is 6 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $48,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $38,000. The annual cash inflows for the next three years will be:

 

You buy a new piece of equipment for $31,706, and you receive a cash inflow of $4,200 per year for 17 years. Use Appendix D for an approximate answer but calculate your final answer using the financial calculator method.

 

X-treme Vitamin Company is considering two investments, both of which cost $51,000. The cash flows are as follows:

 

The Short-Line Railroad is considering a $165,000 investment in either of two companies. The cash flows are as follows:



Assume a corporation has earnings before depreciation and taxes of $122,000, depreciation of $40,000, and that it has a 30 percent tax bracket.

 

Question 1
Assume a corporation has earnings before depreciation and taxes of $110,000, depreciation of $48,000, and that it has a 30 percent tax bracket.
 

a. Compute its cash flow using the following format. (Input all answers as positive values.)

 

b. How much would cash flow be if there were only $16,000 in depreciation? All other factors are the same.

 

c. How much cash flow is lost due to the reduced depreciation from $48,000 to $16,000?

 

Question 2
The Short-Line Railroad is considering a $205,000 investment in either of two companies. The cash flows are as follows:
 

a. Compute the payback period for both companies. (Round your answers to 1 decimal place.)

 

b. Which of the investments is superior from the information provided?

 

Question 3
X-treme Vitamin Company is considering two investments, both of which cost $11,000. The cash flows are as follows:
 

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal places.)

 

a-2. Which of the two projects should be chosen based on the payback method?

 

b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

 

b-2. Which of the two projects should be chosen based on the net present value method?

 

c. Should a firm normally have more confidence in the payback method or the net present value method?

 

Question 4
You buy a new piece of equipment for $28,808, and you receive a cash inflow of $3,700 per year for 14 years. Use Appendix D for an approximate answer but calculate your final answer using the financial calculator method.
 

What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

Question 5
Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $52,000. The annual cash inflows for the next three years will be:
 

Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial calculator method.

 

a. Determine the internal rate of return.  (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

b. With a cost of capital of 14 percent, should the equipment be purchased?

 

Question 6
The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $51,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
 

a. If the cost of capital is 12 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

 

b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

c. Should the project be accepted?

 

Question 7
Turner Video will invest $88,500 in a project. The firm’s cost of capital is 10 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.
 

a. If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years? (Use the given internal rate of return. Do not round intermediate calculations and round your answer to 2 decimal places.)

 

c. Which investment assumption is better?

 

Question 8
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
 

a. Determine the net present value of the projects based on a zero percent discount rate.

 

b. Determine the net present value of the projects based on a discount rate of 9 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 9 percent?

 

Question 9
Telstar Communications is going to purchase an asset for $580,000 that will produce $280,000 per year for the next four years in earnings before depreciation and taxes. The asset will be depreciated using the three-year MACRS depreciation schedule in Table 12–12. (This represents four years of depreciation based on the half-year convention.) The firm is in a 30 percent tax bracket.
 

Question 10
The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $140,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12.
 

The firm is in a 35 percent tax bracket and has a cost of capital of 7 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

a. Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

 

b. Under the net present value method, should Summit Petroleum Corporation purchase the asset?

 

Question 11
An asset was purchased three years ago for $190,000. It falls into the five-year category for MACRS depreciation. The firm is in a 30 percent tax bracket. Use Table 12–12.
 

a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $22,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)

 

b. Compute the gain and related tax on the sale if the asset is sold now for $70,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)

 

Question 12
DataPoint Engineering is considering the purchase of a new piece of equipment for $280,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of $180,000 in nondepreciable working capital. Forty-five thousand dollars of this investment will be recovered after the sixth year and will provide additional cash flow for that year. Income before depreciation and taxes for the next six are shown in the following table. Use Table 12–11, Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
 

The tax rate is 30 percent. The cost of capital must be computed based on the following:

 

a. Determine the annual depreciation schedule. (Do not round intermediate calculations. Round your depreciation base and annual depreciation answers to the nearest whole dollar. Round your percentage depreciation answers to 3 decimal places.)

 

b. Determine the annual cash flow for each year. Be sure to include the recovered working capital in Year 6. (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

c. Determine the weighted average cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

d-1. Determine the net present value. (Use the WACC from part c rounded to 2 decimal places as a percent as the cost of capital (e.g., 12.34%). Do not round any other intermediate calculations. Round your answer to 2 decimal places.)

 

d-2. Should DataPoint purchase the new equipment?

 

Question 13
Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $66,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $28,800. A new piece of equipment will cost $156,000. It also falls into the five-year category for MACRS depreciation. Assume the new equipment would provide the following stream of added cost savings for the next six years. Use Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
 

The firm’s tax rate is 40 percent and the cost of capital is 9 percent.

 

a. What is the book value of the old equipment? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

b. What is the tax loss on the sale of the old equipment? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

c. What is the tax benefit from the sale? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

d. What is the cash inflow from the sale of the old equipment? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

e. What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

f. Determine the depreciation schedule for the new equipment. (Round the depreciation base and annual depreciation answers to the nearest whole dollar. Round the percentage depreciation factors to 3 decimal places.)

 

g. Determine the depreciation schedule for the remaining years of the old equipment. (Round the depreciation base and annual depreciation answers to the nearest whole dollar. Round the percentage depreciation factors to 3 decimal places.)

 

h. Determine the incremental depreciation between the old and new equipment and the related tax shield benefits. (Enter the tax rate as a decimal rounded to 2 decimal places. Round all other answers to the nearest whole dollar.)

 

i. Compute the aftertax benefits of the cost savings. (Enter the aftertax factor as a decimal rounded to 2 decimal places. Round all other answers to the nearest whole dollar.)

 

j-1. Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual benefits. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

 

j-2. Compute the present value of the total annual benefits. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

k-1. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e). (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to the nearest whole dollar.)

 

k-2. Should the replacement be undertaken?

 

Question 14
Assume you are risk-averse and have the following three choices.
 

a. Compute the coefficient of variation for each. (Round your answers to 3 decimal places.)

 

b. Which project will you select?

 

Question 15
Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are given next:
 

a. What is the expected value of unit sales for the new product? (Do not round intermediate calculations and round your answer to the nearest whole unit.)

 

b. What is the standard deviation of unit sales? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Question 16
Shack Homebuilders Limited is evaluating a new promotional campaign that could increase home sales. Possible outcomes and probabilities of the outcomes are shown next.      
 

Compute the coefficient of variation. (Do not round intermediate calculations. Round your answer to 3 decimal places.)

 

Question 17
Five investment alternatives have the following returns and standard deviations of returns. 
 

Calculate the coefficient of variation and rank the five alternatives from lowest risk to the highest risk by using the coefficient of variation. (Round your answers to 3 decimal places.)

 

Question 18
Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.
 

a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.)

 

a-2. Which one of the following four investments should Tim choose?

 

b. Which one of the four investments should Mike choose?

 

Question 19
Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. Lakeway Train Co. is more typical of the average corporation and is risk-averse.
 

a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.)

 

a-2. Which projects should Mountain Ski Corp. choose?

 

b. Which one of the four projects should Lakeway Train Co. choose based on the same criteria of using the coefficient of variation?

 

Question 20
Waste Industries is evaluating a $56,500 project with the following cash flows.  
 

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

a. Select the appropriate discount rate.

 

b. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

 

c. Based on the net present value should the project be undertaken?

 

Question 21
Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 8 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 12 percent. Either method will require an initial capital outlay of $99,000. The inflows from projected business over the next five years are shown next.  
 

Use Appendix B for an approximate answer but calculate your final answers using the formula and financial calculator methods.

 

a. Calculate net present value for Method 1 and Method 2.(Do not round intermediate calculations and round your answers to 2 decimal places.)

 

b. Which method should be selected using net present value analysis?

 

Question 22
Debby’s Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of its aerobics dancing. The equipment will cost $22,400. Debby is not sure how many members the new equipment will attract, but she estimates that her increased annual cash flows for each of the next five years will have the following probability distribution. Debby’s cost of capital is 12 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods.
 

a. What is the expected value of the cash flow? The value you compute will apply to each of the five years.

 

b. What is the expected net present value? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

 

c. Should Debby buy the new equipment?

 

Question 23
Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment will be made. The Australian gold mine will cost $1,609,000 and will produce $370,000 per year in years 5 through 15 and $538,000 per year in years 16 through 25. The U.S. gold mine will cost $2,032,000 and will produce $312,000 per year for the next 25 years. The cost of capital is 5 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. (Note: In looking up present value factors for this problem, you need to work with the concept of a deferred annuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years; the returns in years 16 through 25 represent 10 years.)
 

a-1. Calculate the net present value for each project. (Do not round intermediate calculations and round your answers to 2 decimal places.)

 

a-2. Which investment should be made?

 

b-1. Assume the Australian mine justifies an extra 3 percent premium over the normal cost of capital because of its riskiness and relative uncertainty of cash flows. Calculate the new net present value given this assumption. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

 

b-2. Does the new assumption change the investment decision?