Questions Set 72:

Solution

1) Five years ago, a pharmaceutical company bought a machine that produces pain-reliever medicine at a cost of $2 million. The machine has been depreciated over the past five years, and the current book value is $1,100,000. The company decides to sell the machine now at its market price of $1 million. The marginal tax rate is 34 percent.
What is the relevant cash flow for the machine project?
What is the relevant cash flow if the market price of the machine is $600,000 instead?

2)Healthy Potions, Inc., is considering investing in a new production line of eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $10,000, increase the level of inventory by $50,945, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the investment. Healthy Potions will recover these changes in working capital at the end of the project 9 years later. If the appropriate discount rate is 14.9 percent what is the net effect on the today’s value of the project?

3Given the soaring price of gasoline, Ford is considering introducing a new production line of gas-electric hybrid sedans. The expected annual sales number of such hybrid cars is 21,000; the price is $22,000 per car. Variable costs of production amount to $13,000 per car. The fixed overhead including salary of top executives is $80 million per year. However, the introduction of the hybrid sedan will decrease Ford’s sales of regular sedans by 7,000 cars per year; the regular sedans have a unit price of $20,000 and unit variable cost of $12,000, and fixed costs of $250,000 per year. Depreciation costs of the production plant are $50,000 per year. The marginal tax rate is 40 percent. What is the incremental annual cash flow from operations?
The incremental annual cash flow from operations is $

4)FITCO is considering the purchase of new equipment. The equipment costs $250,000, and an additional $90,000 is needed to install it. The equipment will be depreciated straight-line to zero over a five-year life. The equipment will generate additional annual revenues of $220,000, and it will have annual cash operating expenses of $83,000. The equipment will be sold for $85,000 after five years. An inventory investment of $73,000 is required during the life of the investment. FITCO is in the 40 percent tax bracket and its cost of capital is 11 percent.
(Round your intermediate calculations to four decimal places and round your final answer to the nearest dollar. If the answer is negative number then put “-” before answer, i.e. -10,000.)
The project’s NPV is

5)Archers Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $13,250,000. The investment will consist of $2,000,000 for land and $11,250,000 for trucks and other equipments. The land, all trucks, and all other equipment are expected to be sold at the end of 10 years at a price of $5 million, $2 million above book value. The farm is expected to produce revenue of $2,000,000 each year, and an after tax annual cash flow from operations of $1,720,000. The marginal tax rate is 35 percent, and the appropriate discount rate is 14.00 percent. NPV = $

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