# Tool makers manufactures equipment for use by other

• Test Prep
• 10
• 95% (110) 105 out of 110 people found this document helpful

This preview shows page 4 - 6 out of 10 pages.

15- Tool Makers manufactures equipment for use by other firms. The initial cost of one customized machine is \$850,000 with an annual operating cost of \$10,000, and a life of 3 years. The machine will be replaced at the end of its life. What is the equivalent annual cost of this machine if the required rate of return is 15 percent and we ignore taxes?\$340,008.02\$375,797.41\$382,280.42\$347,647.78\$351,610.29NPV = ?\$850,000 ? \$10,000
16- The discount rate that makes the net present value of an investment exactly equal to zero is called the:
17- A project will produce after-tax operating cash flows of \$45,000 a year for four years. During the life of the project, net working capital will be reduced by \$5,000. The project requires the purchase of equipment at an initial cost of \$120,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a \$25,000 after-tax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14%? \$49,876.02\$32,037.86\$27,958.66\$3,483.48\$16,117.05Years 0 1 2 3 4OCF -- \$45,000 \$45,000 \$45,000 \$45,000Ch. NWC \$5,000 -- -- -- \$-5,000NCS -\$120,000 -- -- -- \$25,000 Total CF -\$115,000 \$45,000 \$45,000 \$45,000 \$65,000
18- Binder and Sons borrowed \$138,000 for three years from their local bank and now they are paying monthly payments that include both principal and interest. Paying off debt by making installments payments, such as Binder and Sons is doing, is referred to as:
19- Your parents plan to give you \$200 a month for four years while you are in college. At a discount rate of 6 percent, compounded monthly, what are these payments worth to you when you first start college?\$8,797.40\$8,198.79\$8,409.56\$8,279.32\$8,516.06APV = \$200 × [(1 - {1 / [1 + (.06 / 12)]4 × 12}) / (.06 / 12)] = \$8,516.06
20- Wicker Imports established a trust fund that provides \$156,800 in scholarships each year for needy students. The trust fund earns a 4.00 percent rate of return. How much money did the firm contribute to the fund assuming that only the interest income is distributed?
21- What is the net present value of a project that has an initial cash outflow of \$7,670 and cash inflows of \$1,280 in Year 1, \$6,980 in Year 3, and \$2,750 in Year 4? The discount rate is 12.5 percent.
22- Foamsoft sells customized boat shoes. Currently, it sells 16,850 pairs of shoes annually at an average price of \$79 a pair. It is considering adding a lower-priced line of shoes which sell for \$49 a pair. Foamsoft estimates it can sell 5,000 pairs of the lower-priced shoes but will sell 1,250 less pairs of the higher-priced shoes by doing so. What is the estimated value of the erosion cost that should be charged to the lower-priced shoe project?