Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 11, Problem 5P
Wendy’s boss wants to use straight-line
- a. What would the depreciation expense be each year under each method?
- b. Which depreciation method would produce the higher
NPV , and how much higher would it be? - c. Why might Wendy’s boss prefer straight-line depreciation?
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Thomson Media is considering some replacing its equipment. The new equipment will reduce the operating costs by $40,000 every year. It requires initial costs of $80,000 and installation fees of $30,000. The new equipment has a 4-year tax life and would be fully depreciated by the straight-line method, but it would have a salvage value of $25,000 at the end of Year 4, when the project would be closed down. Also, some new working capital of $20,000 would be required, but it would be recovered at the end of the project's life. The old equipment has salvage value of $50,000 today and $18,000 in 4 years. Its book value is $36,000 and gets depreciated by $9,000 every year. The tax rate is 30%, and WACC is 9%. What is the project's NPV?
RocketOwl, Inc. is considering a new product to bring to market. They
estimate the product would have a viable market for five years. If they wish
to do the project they will need to purchase equipment with a price of
$2,287,521. The firm will use straight-line depreciation to a value of
$500,000 and assume the equipment will have a pre-tax salvage value of
$469,308. They estimate revenue and costs for the project as presented in
the table:
Operating Year
1
2
3
4
5
Revenue
$371,693
$861,893
$2,627,053
$1,047,316
$371,693
Costs
$70,569
$330,987
$981,954
$246,165
$70,569
RocketOwl, Inc. expects the project will need initial inventory for the project
of $107,528, and this amount will stay constant throughout the project.
They also expect in the investment year the project will generate accounts
receivable of $65,878 and accounts payable of $35,758. They also assume
that the project will generate accounts payable each year equal to 0.19 of
annual sales and accounts payable equal to 0.06 of…
Mike's landscaping is considering a new 4-year project. The necessary fixed assets will cost $157,000 and be depreciated on a 3-year MACRS and have no salvage value. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. The project will have annual sales of $98,000, variable costs of $27,400, and fixed costs of $12,000. The project will also require net working capital of $2,600 that will be returned at the end of the project. The company has a tax rate of 21 percent and the project's required return is 10 percent. What is the net present value of this project?
Chapter 11 Solutions
Financial Management: Theory & Practice
Ch. 11 - Prob. 2QCh. 11 - Why is it true, in general, that a failure to...Ch. 11 - Prob. 4QCh. 11 - Explain how net operating working capital is...Ch. 11 - How do simulation analysis and scenario analysis...Ch. 11 - Why are interest charges not deducted when a...Ch. 11 - Most firms generate cash inflows every day, not...Ch. 11 - What are some differences in the analysis for a...Ch. 11 - Distinguish among beta (or market) risk,...Ch. 11 - Prob. 11Q
Ch. 11 - Talbot Industries is considering launching a new...Ch. 11 - The financial staff of Cairn Communications has...Ch. 11 - Allen Air Lines must liquidate some equipment that...Ch. 11 - Although the Chen Company’s milling machine is...Ch. 11 - Wendys boss wants to use straight-line...Ch. 11 - The Campbell Company is considering adding a...Ch. 11 - The president of your company, MorChuck...Ch. 11 - The Rodriguez Company is considering an...Ch. 11 - St. Johns River Shipyards welding machine is 15...Ch. 11 - Shao Industries is considering a proposed project...Ch. 11 - The Everly Equipment Company’s flange-lipping...Ch. 11 - The Bartram-Pulley Company (BPC) must decide...Ch. 11 - The Yoran Yacht Company (YYC), a prominent...Ch. 11 - Shrieves Casting Company is considering adding a...Ch. 11 - Disregard the assumptions in Part a. What is the...Ch. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Estimate the required net operating working...Ch. 11 - Prob. 6MCCh. 11 - Calculate the project cash flows for each year....Ch. 11 - Prob. 8MCCh. 11 - What is a real option? What are some types of real...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?arrow_forwardFriedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.arrow_forwardWary Corporation is considering the purchase of a machine that would cost $335,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $48,000. The machine would reduce labor and other costs by $101,000 per year. The company requires a minimum pretax return of 10% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. Required: Determine the net present value of the project. Note: Round your intermediate calculations and final answer to the nearest whole dollar amount. Net present valuearrow_forward
- The Ajax Semiconductor Company is attempting to evaluate the profitability of adding another integrated circuit production line to its present operations. The company would need to purchase two or more acres of land for $275,000 (total). The facility would cost $60,000,000 and have no net MV at the end of five years. The facility could be depreciated using a GDS recovery period of five years. An increment of working capital would be required, and its estimated amount is $10,000,000. Gross income is expected to increase by $30,000,000 per year for five years,andoperating expenses are estimated to be $8,000,000 per year for five years. The firm’s effective income tax rate is 25%. Solve, (a) Set up a table and determine the ATCF for this project. (b) Is the investment worthwhile when the after-tax MARR is 12% per year?arrow_forwardMiller Corporation is considering replacing a machine. The replacement will reduce operating expenses (that is, increase earnings before depreciation, interest, and taxes) by $24,000 per year for each of the 5 years the new machine is expected to last. Although the old machine has zero book value, it can be used for 5 more years. The depreciable value of the new machine is $60,000. The firm will depreciate the machine under MACRS using a 5-year recovery, view table attached, and is subject to a 40% tax rate. Estimate the incremental operating cash inflows generated by the replacement. (Note: Be sure to consider the depreciation in year 6.)arrow_forwardAlmendarez Corporation is considering the purchase of a machine that would cost $150,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $39,000. The company requires a minimum pretax return of 13% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. The net present value of the proposed project is closest to: (Round your intermediate calculations and final answer to the nearest whole dollar amount.) Multiple Choice $(45,000) Q Search (((( |個個arrow_forward
- ACE Ltd is evaluating whether it should invest in a machine that costs $100,000. The machine would be fully depreciated over ten years to zero value using the straight-line depreciation method. With the new machine, the firm projects that it will be able to generate an additional $20,000 annually in sales revenue and additional $10,000 cost annually. The firm would also need an additional net working capital of $40,000. Given the firm’s cost of capital is 10% and tax rate of 20%, calculate annual operating cash flow (OCF) of the investment.arrow_forwardSchultz company is considering purchasing a machine that would cost $478,800 and have a useful life of 5 years. The machinery would reduce cash operating costs by $114,000 per year. The machine would have a salvage value of $6,200. Schultz Company prefers a payback period if 3.5 years or less. compute the payback period for the machine. what does this mean?arrow_forwardMiller Corporation is considering replacing a machine. The replacement will reduce operating expenses (that is, increase earnings before depreciation, interest, and taxes) by $20,000 per year for each of the 5 years the new machine is expected to last. Although the old machine has zero book value, it can be used for 5 more years. The depreciable value of the new machine is $53,000. The firm will depreciate the machine under MACRS using a 5-year recovery Percentage by recovery year* Recovery year 3 years 5 years 7 years 10 years 1 33% 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 9 6% 10 6% 11 4% Totals 100% 100% 100% 100% and is…arrow_forward
- Longhorn Manufacturing is considering a new machine that costs $420,000 and would reduce pre-tax manufacturing costs by $125,000 annually. Longhorn would use the straight line deprecation method to depreciate the machine to zero over its operating life, and management thinks the machine would have a salvage value of $33,000 at the end of its 5-year operating life. With the new machine, working capital would need increase by $35,000. Longhorn’s marginal tax rate is 25%, and a 10% cost of capital is appropriate for the project. a) What is the project's NPV? b) What is the project's IRR? c) What is the project's MIRR?arrow_forwardPenny and Daughter’s construction business is considering purchasing a new Bobcat. The equipment will cost $230,000 and is expected to last 14 years. The Bobcat has a salvage vale of $16,000. Calculate the depreciation AND book value for each year. You can create one table for a-d or you can create different tables for each. This problem will need to be done in excel. (30 points)a. Use straight-line depreciation. (5 points)b. Use declining-balance depreciation with a depreciation rate that ensures the book value equals the salvage vale in the last year of the life of the equipment. c. Use double declining balance depreciation. d. Use MACRS depreciation where the Bobcat is considered a 10 year property. e. Graph the Book values of each methods on a single graph. The graph should have points at each year for each BV and a line of each method. You will have 4 lines on your graph. You should include year 0 on your graph so that all four lines start at the same point. Each method should be…arrow_forwardWayMart Company is considering a long-term investment in a project called PET. PET will require an investment of $100,000. It will have a useful life of 5 years and no salvage value. Annual revenues would increase $70,000, and annual expenses (including depreciation) would increase by $45,000. WayMart uses the straight-line depreciation method to compute depreciation expense. The company's required rate of return is 12%. (20 points) lacarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Fundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Fundamentals Of Financial Management, Concise Edi...
Finance
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Depreciation -MACRS; Author: Ronald Moy, Ph.D., CFA, CFP;https://www.youtube.com/watch?v=jsf7NCnkAmk;License: Standard Youtube License