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quiz2solw02 - Quiz 2 Finance 302 Winter 2002 Instructor...

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Quiz 2 Finance 302 Winter 2002 Instructor: Marlena L. Akhbari Name:________________________ Problem 1 (50 Points) Mom's Cookies Inc. is considering the purchase of a new cookie oven. The original cost of the old oven was $30,000; it is now 2 years old and has a market value of $15,000. The old oven is being depreciated using a MACRS 5-yr. Class life. The old oven can be used for five more years at which time it will have a market value of $1,000. Management is contemplating the purchase of a new oven whose cost is $45,000 with a useful life of 5 years and whose estimated market value at the end of five years is $5,000. The new oven will cause a decrease in inventories of $5,000, but accounts payable will simultaneously increase by $2,000 because Mom will be using new vendors. Sales are expected to increase by $2,000 per year while costs are expected to decrease by $3,000 per year. The new machine will be depreciated using MACRS and a 5-year class life. The cost of capital is 10%. The marginal tax rate is 40%. What is the NPV for this proposal? The IRR? The MIRR? And the Payback Period? What should Mom do? Assume all projects must payback in 3 years. MACRS 5-yr. Schedule: yr. 1= 20%, yr. 2 = 32%, yr. 3 = 19.2%, yr. 4 = 11.52%, yr. 5 = 11.52 %, yr. 6 = 5.76%) PHASE I T=0 BUY NEW MACHINE (45,000) SELL OLD MACHINE MARKET VALUE = 15,000 15,000 INFLOW BOOK VALUE = 14,400 (240) OUTFLOW (TAX DUE) GAIN 600 TAX DUE *.40 240 CHANGE IN NWC
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INVENTORY DEC.
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