FIN 302- Exam #2 Class Notes

FIN 302- Exam #2 Class Notes - Wrap up Chapter 6 Other...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Wrap up Chapter 6 Other issues: What is use: Allocated vs. actual overhead ? Actual Overhead Use true marginal cash flow which is actual overhead if allocated and actual don’t differ. Taxes from Asset Sale: - Initial outlay, change in NWC not subject to taxation’ - Asset sales revenue (at end of project) are taxable…but only the amount of the capital gain - Net Revenue from sale of Asset= Sales Price- Tc [Sales price- book value] - Book Value is equaled to historic purchase- accumulated appreciation or selling asset close to zero Unequal lives: Mutually exclusive projects that will be re-placed, ad-infinitum - Issue: More expensive equipment may last longer, have lower associated expenses, produce higher quality products. But is it worth the higher price? Practice Problems 1: SPROCKETS Compute the NPV of the following project: A project to manufacture SPROCKETS is being considered. a) Initial outlay is $100,000 to be depreciated straight line down to $0 in 10 years. The machine will be sold in year 5 for 50,000 and the project will end at that time . b) Revenues are expected to be $50,000 in year 1, and decrease at a rate of 5% per year. c) Variable expenses associated with the project are expected to be 20% of sales (revenues) for each year. d) Working capital will increase by $15,000 at time 0, increase by another $13,000 in year 1, and decrease by $28,000 at the end of 5 years. e) This project will decrease the sales revenue of the WIDGET division by $10,000 (before tax) per year but will increase sales of the GADGET division by $20,000 per year (before tax). All expenses associated with these divisions will remain unchanged. f) The Sprocket project will be funded with a $100,000, 10% bond issue. g) The firm discounts risky cash flows by the risky rate, and riskless cash flows by the risk free rate of 5%. The depreciation tax shield is the only riskless cash flow. h) The corporate tax rate is 30% i) If the project is accepted , the firm will hire consultants to decide how to market the SPROCKETS, at a cost of $4000 in year 1 (before tax) j) The firm’s WACC is 12%. The above project is of average risk to the firm.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Practice problem 2: Compute the NPV of the following project to make WIDGETS. The project will involve the following outlays: A) A $25,000 study conducted last month determined that the Widgets project will produce annual revenues of $600,000 , and require annual variable costs estimated at 1/3 rd of sales. Revenues will increase at the rate of inflation of 5% per year . (I.e., the second year of revenues will be 5% greater than revenues at the end of the first year.) The project will continue through year 5. B) Fixed costs associated with the project include contracted labor, at $50,000 per year. B) Cost of the Widget machine: $1,000,000, to be incurred at the start of the project (time = 0) & depreciated as a
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/15/2011 for the course FIN 302 taught by Professor Kellybrunarski during the Spring '11 term at Miami University.

Page1 / 24

FIN 302- Exam #2 Class Notes - Wrap up Chapter 6 Other...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online