Capital Budgeting Problem Set - Building The Pride

labor. The firm’s marginal tax rate is 34%. If the firm’s cost of capital is 12%, should the
equipment be purchased?(NPV= -20,637.30 IRR= 6.13%)
54. The Erley Equipment Company purchased a machine 5 years ago at a cost of $100,000.
the machine had an expected life of 10 years at the time of purchase, and an expected
salvage value of zero at the end of 10 years. It is being depreciated by the straight-line
method over its 10-year life.
A new machine can be purchased for $150,000, including installation costs. During its 5-
year life, it will reduce cash operating expenses by $50,000 per year. Sales are not
expected to change. At the end of its useful life, the machine is estimated to be worthless.
The machine would be depreciated straight-line over 5 years.
The old machine can be sold for $65,000. The firm’s tax rate is 34%. the appropriate
discount rate is 16%. Should the replacement machine be purchased? Show your work.
(NPV at 16% 40,216.89; IRR 33.92%)
55. The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a
new computer. The computer’s price is $40,000 and it would cost $5,000 to install the
system. The system falls into the 3-year depreciation class (straight-line to zero book
value). Purchase of the computer would require an increase in net working capital of
$2000. The computer would increase the firm’s revenues by $20,000 per year, but would
also increase the firm’s operating costs by $5,000 per year. The computer is expected to
be used for 3 years and then be sold for $25,000. The firm’s marginal tax rate is 40
percent, and the project’s cost of capital is 14 percent. What should the firm do? Show
your work. (NPV –701.00)
56. Blue Note Jazz Productions has decided to cash in on the country craze by starting a
subsidiary that will promote concerts by "Country Jazz" artists for the next three years.
The country music boom is expected to subside by this time and the subsidiary will be
folded. Blue Note expects that average ticket prices will be $35 and that ticket sales for
the three years will be 300,000 per year. Fixed cost each year are expected to be
$3,000,000 and variable costs are expected to be 25% of sales. The subsidiary will need
$4,000,000 in new equipment to start up and requires a $300,000 investment in working
capital. The $4,000,000 in equipment will be depreciated straight-line over five years to a
zero salvage value, but will be sold at the end of three years for an estimated $1,500,000.
What is the NPV of this new investment if the firm's required rate of return is 12%? The
firm's marginal tax rate is 40%. What is the IRR? Should the project be accepted? (IRR
37.20%; NPV $2,276,314.23; MIRR 29.04%)
57. Mom’s Cookies, Inc. is considering the purchase of a new cookie oven. The original cost
of the old oven was $30,000; it is now 5 years old, and it has a current market value of
$5,000. The old oven is being depreciated over a 10-year life towards a zero estimated
salvage value on a straight line basis, resulting in a current book value of $15,000 and an
annual depreciation expense of $3,000. Management is contemplating the purchase of a
new oven whose cost is $25,000 and whose estimated salvage value is zero. Expected