FINA 3000: REVIEW PROBLEMS, TEST 3 1.) The management of Dawgpound Inc. is evaluating replacing their large mainframe computer with a modern network system that requires much less office space. The network would cost $380,000 (including installation costs) and due to efficiency gains, would generate $95,000 per year in operating cash flows (accounting for taxes and depreciation) over the next five years. The old mainframe has a remaining book value of $50,000 and would be immediately donated to a charity for the tax benefit. Dawgpound’s cost of capital is 9% and the tax rate is 40%. What is the initial cash outlay for this project? What is the NPV of the project? 2.) Suppose that today is December 31, 2007. The following information applies to Crimson Tide Industries for the next year: • After tax, operating income [EBIT(1-T)] for 2008 is expected to be $430 million. • Net investment in PPE for 2008 is expected to be $80 million. • The company’s NWC is expected to increase by $20 million.
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