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1. Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $12 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 35%.
What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ ________
The company spent and expensed $150,000 on research related to the project last year. Would this change your answer?
_________________
Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer?
The project’s cost will _________________ .
 
2. The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:
Projected sales $20 million
Operating costs (not including depreciation) 8 million
Depreciation 6 million
Interest expense 3 million
The company faces a 40% tax rate. What is the project’s operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ ________
 
3. Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $15 million, of which 80% has been depreciated. The used equipment can be sold today for $3.75 million, and its tax rate is 30%. What is the equipment’s after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ ________
 

 
4. The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $840,000, and it would cost another $24,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $568,000. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $383,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 35%.
What is the Year-0 net cash flow?
$ ________
What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
Year 1 $ ________
Year 2 $ ________
Year 3 $ ________
What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar.
$ ________
If the project’s cost of capital is 15 %, what is the NPV of the project? Round your answer to the nearest dollar.
$ ________
Should the machine be purchased?
_________________
 
5. The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firmA????1s R&D department The equipment’s basic price is $90,000, and it would cost another $22,500 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $22,500. Use of the equipment would require an increase in net working capital (spare parts inventory) of $3,600. The machine would have no effect on revenues, but it is expected to save the firm $27,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40%.
What is the Year-0 net cash flow?
$ ________

What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
Year 1 $ ________
Year 2 $ ________
Year 3 $ ________
What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar.
$ ________
If the project’s cost of capital is 13%, should the chromatograph be purchased?
_________________
 
6. St. Johns River Shipyards’s welding machine is 15 years old, fully depreciated, obsolete, and has no salvage value. However, even though it is obsolete, it is perfectly functional as originally designed and can be used for quite a while longer. The new welder will cost $80,000, and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $25,000 to $50,000 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 40%, and the firm’s WACC is 13%. Should the old welder be replaced by the new one?
Old welder _________________ be replaced.

What is the NPV of the project? Round your answer to the nearest cent.
$ ________
 
7. The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,750 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions:
PROJECT A PROJECT B
Probability Net Cash
Flow Probability Net Cash
Flow
0.2 $7,000 0.2 $ 0
0.6 6,750 0.6 6,750
0.2 8,000 0.2 16,000
BPC has decided to evaluate the riskier project at a 12% rate and the less risky project at a 8% rate.
What is the expected value of the annual net cash flows from each project? Round your answers to nearest dollar.
Project A Project B
Net cash flow $ ________ $ ________

What is the coefficient of variation (CV)?
? (to the nearest whole number) CV (to 2 decimal places)
Project A $ ________ ________
Project B $ ________ ________

What is the risk-adjusted NPV of each project? Round your answer to the nearest dollar.
Project A $ ________
Project B $ ________
If it were known that Project B is negatively correlated with other cash flows of the firm whereas Project A is positively correlated, how would this affect the decision?
This would tend to reinforce the decision to _________________ Project B.

If Project B’s cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk?
_________________
 

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