# St. John's Paper

Good Essays
771 Words
Grammar
Plagiarism
Writing
Score
St. John's Paper
1) The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of \$30,000 per year in Years 1 through 4, \$35,000 per year in Years 5 through 9, and \$40,000 in Year 10. This investment will cost the firm \$150,000 today, and the firm’s cost of capital is 10 percent. What is the payback period for this investment?

Payback period

Using the even cash flow distribution assumption, the project will completely recover the initial investment after \$30/\$35 = 0.86 of Year 5:
Payback = 4 + = 4.86 years.

2) As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:

Project
If the firm’s cost of capital is 14 percent and its tax rate is 40 percent, what is the project’s IRR?

IRR Financial calculator solution:
Inputs: CF0 = -200000; CF1 = 44503; Nj = 10. Output: IRR = 18%.

4) St. John’s Paper is considering purchasing equipment today that has a depreciable cost of \$1 million. The equipment will be depreciated on a MACRS 5-year basis, which implies the following depreciation schedule:

MACRS Depreciation
Year Rates 1 0.20 2 0.32 3 0.19 4 0.12 5 0.11 6 0.06

Assume that the company sells the equipment after three years for \$400,000 and the company’s tax rate is 40 percent. What would be the tax consequences resulting from the sale of the equipment?

Taxes on gain on sale When the machine is sold the total accumulated depreciation on it is: (0.20 + 0.32 + 0.19)  \$1,000,000 = \$710,000. The book value of the equipment is: \$1,000,000 - \$710,000 = \$290,000. The machine is sold for \$400,000, so the gain is \$400,000 - \$290,000 = \$110,000. Taxes are calculated as \$110,000  0.4 =
The company has estimated that the project’s NPV is \$3 million, but this does not consider that the new laundry detergent will reduce the revenues received on its existing laundry detergent products. Specifically, the company estimates that if it develops WOW the company will lose \$500,000 in after-tax cash flows during each of the next 10 years because of the cannibalization of its existing products. Ellison’s WACC is 10 percent. What is the net present value (NPV) of undertaking WOW after considering

## You May Also Find These Documents Helpful

• Satisfactory Essays

A project has initial costs of \$3,000 and subsequent cash inflows in years 1 – 4 of \$1350, 275, 875, and 1525. The company 's cost of capital is 10%. Calculate NPV for this project.…

• 836 Words
• 4 Pages
Satisfactory Essays
• Satisfactory Essays

A project has initial costs of \$3,000 and subsequent cash inflows in years 1 ? 4 of \$1350, 275, 875, and 1525. The company's cost of capital is 10%. Calculate the payback period for this project.…

• 1062 Words
• 5 Pages
Satisfactory Essays
• Better Essays

The financial assistant received the important assignment by memorandum from the CEO. The memorandum stated that the company is considering the introduction of a new product (Keown, Martin, Perry, & Scott, 2005). Caradonia is currently at a 34% marginal tax bracket with a 15% required rate of return or cost of capital (Keown, Martin, Perry, & Scott, 2005). The new project is estimated to last five years and then be terminated because of being a fad project (Keown, Martin, Perry, & Scott, 2005). The financial assistant must analyze two mutually exclusive projects. Each project has an 11% rate of return and a life span of five years (Keown, Martin, Perry, & Scott, 2005). The following table (table one) shows the expected cash flows for each project.…

• 1388 Words
• 6 Pages
Better Essays
• Good Essays

2) For year 1 the new system depreciated by 20 percent. Multiply that by the net initial investment and you get the total amount depreciated after 1 year, equal to \$60,588. With a 36 percent tax rate you get the depreciated tax savings of \$21,812.…

• 2198 Words
• 9 Pages
Good Essays
• Good Essays

37. [LO 3, 4] In year 0, Longworth Partnership purchased a machine for \$40,000 to use in its business. In year 3, Longworth sold the machine for \$35,000. Between the date of the purchase and the date of the sale, Longworth depreciated the machine by \$22,000.…

• 2229 Words
• 9 Pages
Good Essays
• Good Essays

Flowers Unlimited is considering purchasing an additional delivery truck. The cost of the new truck will be \$42,000. Cost savings are expected to be \$12,800 for the next two years and \$8,900 for the following two years and \$5,000 for the last 3 years of the truck’s useful life. What is the payback period for this project? What is the discounted payback period for this project assuming a discount rate of 10 percent?…

• 1228 Words
• 5 Pages
Good Essays
• Good Essays

The IRR is 15% using the discount rate of 10% and fuel price of \$0.8 per gallon, and 42.78%…

• 550 Words
• 1 Page
Good Essays
• Better Essays

12. Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:…

• 1283 Words
• 6 Pages
Better Essays
• Satisfactory Essays

Hi-Crest Company purchased a machine on January 1, 2010, for \$300,000. The machine has an estimated useful life of 5 years and a \$10,000 residual value. Calculate depreciation expense and the year-end book value for 2010 and 2011 using the double declining-balance method of depreciation.…

• 682 Words
• 3 Pages
Satisfactory Essays
• Satisfactory Essays

On January 1, 2012, Fulsom Corporation purchased a machine for \$50,000. Fulsom paid shipping expenses of \$500 as well as installation costs of \$1,200. Fulsom estimated the machine would have a useful life of ten years and an estimated salvage value of \$3,000. If Fulsom records depreciation using the straight-line method, depreciation expense for 2013 is…

• 355 Words
• 4 Pages
Satisfactory Essays
• Satisfactory Essays

On January 1, a machine with a useful life of five years and a residual value of \$40,000 was purchased for \$120,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation?…

• 1727 Words
• 14 Pages
Satisfactory Essays
• Good Essays

If the \$50,000 expenditure is capitalized and then depreciated using a five-year MACRS depreciation schedule, the value of the tax shield is:…

• 732 Words
• 3 Pages
Good Essays
• Satisfactory Essays

McGilla Golf Company is thinking about undertaking a new project to add a line of golf clubs to add to their product line. Based on market research their net income will increase by 3,240,000 per year for seven years. When analyzing their required net working capital, capital spending and operating cash flow over these 7 years, their NPV is positive at \$6,480,747.29. Based on these projections adding the line of gold clubs is an acceptable project for the company. The internal rate of return is greater than 14%, it works out to be 28%, indicating that the project is acceptable.…

• 505 Words
• 3 Pages
Satisfactory Essays
• Satisfactory Essays

8. Discounted Payback. Your company is seriously considering investing in a new project opportunity but cash flow is tight these days. Top management is concerned about how long it will take for this new project to pay back the initial investment of \$50,000. You have determined that the project should generate inflows of \$30,000, \$30,000, \$40,000, \$25,000, and \$15,000 for the next five years. Your firm’s required rate of return is 15%. How long will it take to pay back the initial investment? 2 años y un poco del tercer año. (0.05meses)…

• 356 Words
• 2 Pages
Satisfactory Essays
• Satisfactory Essays

If we make decision based on NPV or IRR or PI, we should accept this project. This is because the project has a positive NPV, its PI over 1 and the IRR is more than the required rate of return. All of this factors mean that the project can actually benefit the company. However, since your company required that all the projects have a payback period of 2 years or less and a discounted payback period of 2.5 years or less, I recommend that you should reject this particular project. This is because the exact Payback Period and discounted Payback Period are 4.62 years and 5.58 years, which are far beyond the requirements. Therefore, the project should be reject.…

• 520 Words
• 3 Pages
Satisfactory Essays