Principles of Finance; Berkeley College; Week 10 Assignment
Calculate the net present value and profitability index of a project with a net investment of $20,000 and expected net cash inflows of $3,000 a year for 10 years if the project’s required return is12 percent. Is the project acceptable?
Afirmwishestobidonacontractthatisexpectedtoyieldthefollowingafter-tax net cash flows at the end of each year:
Year Net Cash Flow
$5,000 8,000 9,000 8,000 8,000 5,000 3,000 $–1,500
To secure the contract, the firm must spend $30,000 to retool its plant. This retooling will have no salvage value at the end of the 8 years. Comparable investment alternatives are available to the firm that earns 12 percent compounded annually. The depreciation tax benefit from the retooling is reflected in the net cash flows in the table.
Jefferson Products Inc. is considering purchasing a new automatic press brake, which costs $300,000 including installation and shipping. The machine is expected to generate net cash inflows of $80,000 per year for 10 years. At the end of 10 years, the book value of the machine will be $0, and it is anticipated that the machine will be sold for $100,000. If the press brake project is undertaken, Jefferson will have to increase its net working capital by $75,000. When the project is terminated in 10 years, there will no longer be a need for this incremental working capital, and it can be liquidated and made available to Jefferson for other uses. Jefferson requires a 12 percent annual return on this type of project and its marginal tax rate is 40 percent.
a. Calculate the press brake’s net present value.
b. Is the project acceptable?
c. What is the meaning of the computed net present value figure?
d. What is the project’s internal rate of return?
e. For the press brake project, at what annual rates of return do the net present value and internal rate of return methods assume that the net cash inflows are being reinvested?
An acre planted with walnut trees is estimated to be worth $12,000 in 25 years. If you want to realize a 15 percent rate of return on your investment, how much can you afford to invest per acre?
A company is planning to invest $100,000 (before tax) in a personnel training program. The $100,000 outlay will be charged off as an expense by the firm this year (year 0). The returns from the program in the form of greater productivity and a reduction in employee turnover are estimated as follows (on an after-tax basis):
Years 1–10: $10,000 per year
Years 11–20: $22,000 per year
The company has estimated its cost of capital to be 12 percent. Assume that the entire $100,000 is paid at time 0 (the beginning of the project). The marginal tax rate for the firm is 40 percent. Should the firm undertake the training program? Why or why not?