B.What are the net operating cash flows for Year 1 and 2? C.What is the total value of the additional considerations at the end of the five years? D.What is the Net Present Value of the machine? 36
19.Natural Beverages is contemplating the replacement of one of its bottling machines witha newer and more efficient one. The old machine has a book value of $400,000 and a remaining useful life of five years. The salvage value of the old machine (for depreciation and cash flow purposes) is $50,000. The firm can sell it now to another firm in the industry for $200,000. The new machine has a purchase price of $1.2 million,an estimated useful life of five years, and an estimated salvage value in five years of $20,000. Additional costs of installation will be $25,000. It is expected to economize onoperating costs and to reduce the number of defective bottles. In total, an annual saving of $250,000 will be realized if the new machine is installed. The new machine will require an additional $15,000 in inventory (spare parts). The company is in the 40 percent marginal tax bracket and has a 12 percent required rate of return. The machinequalifies as a 3-year property under MACRS (33%, 45%, 15%, 7%).A.What is the initial investment required for this replacement decision? B.What are the net operating cash flows for years one and two? C.What is the value of the additional considerations in year 5? D.What is the NET PRESENT Value of this replacement decision? 37
20.Huang Industries is considering a proposed project for its capital budget. The company estimates that the project's NPV is $12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The company's CFO, however, forecasts that there is only a 50 percent chance that the economy will be average. Recognizing this uncertainty, she has performed the following scenario analysis:EconomicProbabilityScenarioof OutcomeNPV Recession0.05($70 million)Below Average 0.20($25 million)Average0.50$12 millionAbove Average0.20$20 millionBoom0.05$30 millionWhat is the project's expected NPV, its standard deviation, and its coefficient of variation? 38
CHAPTER TWELVE PROBLEMS 1.Quick Launch Rocket Company, a satellite launching firm, expects its sales to increase by 50 percent in the coming year as a result of NASA's recent problems with the space shuttle. The firm's current EPS is $3.25. Its degree of operating leverage is 1.6, while its degree of financial leverage is 2.1. What is the firm's projected EPS for the coming year using the DTL approach?
You've reached the end of your free preview.
Want to read all 46 pages?