a 15394 b 14093 c 58512 d 21493 e 46901 MACRS table required 132 New project

A 15394 b 14093 c 58512 d 21493 e 46901 macrs table

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a. -\$15,394 b. -\$14,093 c. -\$58,512 d. -\$21,493 e. -\$46,901 [MACRS table required] (13.2) New project NPV Answer: b Diff: M 63 . Stanton Inc. is considering the purchase of a new machine which will reduce manufacturing costs by \$5,000 annually and increase earnings be- fore depreciation and taxes by \$6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it expects to sell the ma- chine at the end of its 5-year operating life for \$10,000 before taxes. Stanton's marginal tax rate is 40 percent, and it uses a 9 percent cost of capital to evaluate projects of this type. If the machine's cost is \$40,000, what is the project's NPV? a. \$1,014 b. \$2,292 c. \$7,550 d. \$ 817 e. \$5,040 Page 16 Chapter 13: Capital Budgeting: Cash Flows and Risk
(13.2) New project NPV Answer: c Diff: M 64 . Parker Products manufactures a variety of household products. The com- pany is considering introducing a new detergent. The company’s CFO has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.) The project has an anticipated economic life of 4 years. The company will have to purchase a new machine to produce the de- tergent. The machine has an up-front cost (t = 0) of \$2 million. The machine will be depreciated on a straight-line basis over 4 years (that is, the company’s depreciation expense will be \$500,000 in each of the first four years (t = 1, 2, 3, and 4). The company anticipates that the machine will last for four years, and that af- ter four years, its salvage value will equal zero. If the company goes ahead with the proposed product, it will have an effect on the company’s net operating working capital. At the out- set, t = 0, inventory will increase by \$140,000 and accounts payable will increase by \$40,000. At t = 4, the net operating working capi- tal will be recovered after the project is completed. The detergent is expected to generate sales revenue of \$1 million the first year (t = 1), \$2 million the second year (t = 2), \$2 mil- lion the third year (t = 3), and \$1 million the final year (t = 4). Each year the operating costs (not including depreciation) are ex- pected to equal 50 percent of sales revenue. The company’s interest expense each year will be \$100,000. The new detergent is expected to reduce the after-tax cash flows of the company’s existing products by \$250,000 a year (t = 1, 2, 3, and 4). The company’s overall WACC is 10 percent. However, the proposed project is riskier than the average project for Parker; the project’s WACC is estimated to be 12 percent. The company’s tax rate is 40 percent. What is the net present value of the proposed project? a. -\$ 765,903.97 b. -\$1,006,659.58 c. -\$ 824,418.62 d. -\$ 838,997.89 e. -\$ 778,583.43 Chapter 13: Capital Budgeting: Cash Flows and Risk Page 17
(13.6) Risky projects Answer: d Diff: M 65 . Cochran Corporation has a weighted average cost of capital of 11 per- cent for projects of average risk. Projects of below-average risk have a cost of capital of 9 percent, while projects of above-average risk have a cost of capital equal to 13 percent. Projects A and B are mutu- ally exclusive, whereas all other projects are independent. None of the projects will be repeated.

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