Q1.Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an

initial fixed asset investment of $2.55 million. The fixed asset will be depreciated straight-line to zero over

its three-year tax life. The project is estimated to generate $2,030,000 in annual sales, with costs of

$725,000. The tax rate is 35 percent and the required return is 15 percent. The project requires an initial

investment in net working capital of $250,000, and the fixed asset will have a market value of $285,000

at the end of the project.

What is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate

calculations. Negative amounts should be indicated by a minus sign.)

Years

Year 0

Year 1

Year 2

Year 3

Cash Flow

$

$

$

$

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What is the NPV? (Do not round intermediate calculations and round your final answer to 2

decimal places. (e.g., 32.16))

NPV

$

Q2.Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an

initial fixed asset investment of $2.85 million. The fixed asset falls into the three-year MACRS class. The

project is estimated to generate $2,130,000 in annual sales, with costs of $815,000. The project requires

an initial investment in net working capital of $350,000, and the fixed asset will have a market value of

$235,000 at the end of the project.

If the tax rate is 34 percent and the required return is 11 percent, what is the project’s Year 1 net cash

flow? Year 2? Year 3? (Use MACRS) Link to MACRS http://lectures.mhhe.com/connect/0077479475/Table

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(Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts should be

indicated by a minus sign. Do not round intermediate calculations and round your final answers

to 2 decimal places. (e.g., 32.16))

Years

Year 0

Year 1

Year 2

Year 3

Cash Flow

$

$

$

$

What is the NPV? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round

intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

NPV

$

Q3You are evaluating two different silicon wafer milling machines. The Techron I costs $213,000, has a

three-year life, and has pretax operating costs of $54,000 per year. The Techron II costs $375,000, has a

five-year life, and has pretax operating costs of $27,000 per year. For both milling machines, use

straight-line depreciation to zero over the project’s life and assume a salvage value of $31,000. If your

tax rate is 30 percent and your discount rate is 9 percent, compute the EAC for both

machines. (Negative amounts should be indicated by a minus sign. Do not round intermediate

calculations and round your final answers to 2 decimal places. (e.g., 32.16))

EAC

Techron I

Techron II

$

$

Q4.Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a

new machine press for $390,000 is estimated to result in $150,000 in annual pretax cost savings. The

press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of

$66,000. The press also requires an initial investment in spare parts inventory of $12,000, along with an

additional $1,700 in inventory for each succeeding year of the project. The shop’s tax rate is 35 percent

and its discount rate is 9 percent. Refer to Table 6.8. see table at http://ezto.mhhmdemo.mcgrawhill.com/servlet/TestPilot4/laserwords2/13185743031397711.tp4/table10-7.jpg

Calculate the NPV of this project. (Do not round intermediate calculations and round your final

answer to 2 decimal places. (e.g., 32.16))

NPV

$

Q5.Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt

systems. System A costs $224,000, has a four-year life, and requires $71,000 in pretax annual operating

costs. System B costs $318,000, has a six-year life, and requires $65,000 in pretax annual operating

costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage

value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 30 percent

and the discount rate is 9 percent.

Calculate the NPV for both conveyor belt systems. (Do not round intermediate calculations

and round your answer to 2 decimal places. (e.g., 32.16). Negative amounts should be indicated

by a minus sign.)

NPV

System A

System B

$

$

Q6.Etonic Inc. is considering an investment of $385,000 in an asset with an economic life of 5 years. The

firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be

$265,000 and $90,000, respectively. Both revenues and expenses will grow thereafter at the annual

inflation rate of 3 percent. Etonic will use the straight-line method to depreciate its asset to zero over five

years. The salvage value of the asset is estimated to be $65,000 in nominal terms at that time. The onetime net working capital investment of $20,000 is required immediately and will be recovered at the end

of the project. All corporate cash flows are subject to a 34 percent tax rate.

What is the project’s total nominal cash flow from assets for each year? (Do not round intermediate

calculations. Negative amounts should be indicated by a minus sign.)

Cash flow

Year 0

Year 1

$

$

Year 2

Year 3

Year 4

Year 5

$

$

$

$

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