Finance Problems

Finance Problems Student Help 1. The Taylor Corporation is using a machine that originally cost $66,000. The machine has a book value of $66,000 and a current market value of $40,000. The asset is in the Class 5 CCA pool which allows 35% depreciation per year. It will have no salvage value after 5 years and the company tax rate is 40 percent. Jacqueline Elliott, the Chief Financial Officer of Taylor, is considering replacing this machine with a newer model costing $70,000. The new machine will cut operating costs by $10,000 each year for the next five years. Taylor’s cost of capital is 8 percent. Should the firm replace the asset? (Use NPV methodology to solve this problem).
a. Prepare a time scale showing the cash inflows and outflows for the entire period.

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b. What is the total cash out flow in Year 0?
c. What would be the PV of the total cash inflows?
d. Calculate the PV of CCA Tax Shield
e. Calculate the NPV of the Project.
f. Should the company go ahead with the project or not
2. The law firm of Bushmaster, Cobra and Asp is considering investing in a complete small business computer system. The initial investment will be $35,000 and the hardware, which will be used for 10 years with a salvage value of $5,000, and software of $20,000. In each of years 3, 5, and 7, $5,000 will be spent for additional software. Hardware has a CCR rate 45 percent and software is class 12 (100 percent). The computer system is expected to provide additional revenue of $15,000 per year for the next ten years and to reduce expenses by $10,000 per year for the same period. The firm’s cost of capital is 12 percent and its tax rate is 40 percent. Based on a net present value analysis, should this investment be accepted?
a. Prepare a time scale showing the cash inflows and outflows for the entire period.
b. What is the total cash out flow in Year 0?
c. What would be the PV of the total cash inflows?
d. Calculate the PV of CCA Tax Shield
e. Calculate the NPV of the Project.
f. Should the company go ahead with the project or not
3. Suppose we are thinking about renovating a leased office. The renovations would cost $310,000. They would be depreciated on a straight line basis over the six year term of the lease. The new office would reduce heating and cooling costs by $30,000 per year. The manager also thinks that employees would be less likely to call in sick and be more productive. Also the new office would attract more customers. The combined employee productivity and increased sales is estimated to increase EBIT by $23,000 annually. The tax rate is 35% and the cost of capital for the company is 14.5%. Use NPV methodology to determine if the project should go ahead or not.
a. Prepare a time scale showing the cash inflows and outflows for the entire period.
b. What is the total cash out flow in Year 0?
c. What would be the PV of the total cash inflows?
d. Calculate the PV of CCA Tax Shield
e. Calculate the NPV of the Project.
f. Should the company go ahead with the project or not?
 
4. A new modular paver has been introduced into the market. The technology is so innovative that it makes all previous pavers obsolete. Standard Construction had just purchased a new paver last year for $550,000. It was worth $470,000 on the market, but the new technology paver has reduced the market value to $55,000 today. If the company keeps the new paver for 10 years as planned, the salvage value of the paver would be $5,000. The new excavator costs $650,000 and would increase revenues by $80,000 per year. The new excavator has a 10 year life and an expected salvage value of $135,000. The company’s tax rate is 35% and the CCA rate for this type of industrial machinery is 20%. Depreciation is calculated using the declining balance. The company expected rate of return is 13%. Should the company get rid of the current paver and buy the new technology one. Use NPV methodology to determine what the company should do.
a. Prepare a time scale showing the cash inflows and outflows for the entire period.
b. What is the total cash out flow in Year 0?
c. What would be the PV of the total cash inflows?
d. Calculate the PV of CCA Tax Shield
e. Calculate the NPV of the Project.
f. Should the company go ahead with the project or not?
 
5. Dairy Corp. has a $15 million bond obligation outstanding which it is considering refunding. The bonds were issued at 11.5% and the interest rates on similar bonds have declined to 8%. The bonds have twelve years of their 20 year maturity remaining. Dairy will pay a call premium of 5% and will incur underwriting costs of $350,000 immediately. There is no underwriting cost consideration on the old bond. The company is in a 40% tax bracket. There is no overlap interest period. Should the old issue be refunded?
 

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