Chapter 6
Questions and Problems 2: Calculating Project NPV
The Best Manufacturing Company is considering a new investment Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All networking capital is recovered at the end of the project.
a. Compute the incremental net income of the investment for each year.
b. Compute the incremental cash flows of the investment for each year.
c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?
Questions and Problems 19: Equivalent Annual Cost
Bridgton Golf Academy is evaluating different golf practice equipment. The "Dimple-Max* equipment costs $94,000, has a three year life, and costs $8,600 per year to operate. The relevant discount rate is 12 percent. Assume that the straight line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $18,000 at the end of the project's life. The relevant tax rate is 34 percent. All cash flows occur at the end of year. What is the equivalent annual cost (EAC) of this equipment?
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We will use the bottom-up approach to calculate the operating cash flow for each year. We also must be sure to include the networking capital cash flows each year. So, the net income and total cash flow each year will be:
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