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eng111_HW4_solutions

eng111_HW4_solutions - ENG 111 HW4 Solutions Winter 2009 Q1...

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ENG 111 HW4 Solutions Winter 2009 Q1. Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate 2,400,000 in annual sales, with costs of 960,000. The tax rate is 35 percent and the required return is 15 percent. What is the project’s NPV? ANS: Q2. Hagar Industrial Systems Company is trying to decide between two different conveyor belt systems. System A costs $430,000, has a four-year life, and requires $120,000 in pretax annual operating costs. System B costs $540,000, has a six-year life, and requires $80,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. If the tax rate is 34 percent and the discount rate is 20 percent, which system should the firm choose?
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