Complete the following problem from chapter 10 in the textbook:
Complete the following problems from chapter 11 in the textbook:
Follow these instructions for completing and submitting your assignment:
- Do all work in Excel. Do not submit Word files or *.pdf files.
- Submit a single spreadsheet file for this assignment. Do not submit multiple files.
- Place each problem on a separate spreadsheet tab.
- Label all inputs and outputs and highlight your final answer.
- Follow the directions in “Guidelines for Developing Spreadsheets.”
P10-25 All techniques with NPV profile: Mutually exclusive projects Projects A and B, of
equal risk, are alternatives for expanding Rosa Company’s capacity. The firm’s cost
of capital is 13%. The cash flows for each project are shown in the following table.
a. Calculate each project’s payback period.
b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes, and
discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which project
you would recommend. Explain why.
Sunk costs and opportunity costs. Masters Golf Products, Inc., spent 3 years and
$1,000,000 to develop its new line of club heads to replace a line that is becoming obsolete.
To begin manufacturing them, the company will have to invest $1,800,000 in
new equipment. The new clubs are expected to generate an increase in operating cash
inflows of $750,000 per year for the next 10 years. The company has determined that
the existing line could be sold to a competitor for $250,000.
a. How should the $1,000,000 in development costs be classified?
b. How should the $250,000 sale price for the existing line be classified?
c. Depict all the known relevant cash flows on a time line.
Book value and taxes on sale of assets. Troy Industries purchased a new machine
3 years ago for $80,000. It is being depreciated under MACRS with a 5-year recovery
period using the percentages given in Table 4.2 on page 000. Assume a 40% tax rate.
a. What is the book value of the machine?
b. Calculate the firm’s tax liability if it sold the machine for each of the following
amounts: $100,000; $56,000; $23,200; and $15,000.
Relevant cash flows for a marketing campaign Marcus Tube, a manufacturer of
high-quality aluminum tubing, has maintained stable sales and profits over the past
10 years. Although the market for aluminum tubing has been expanding by 3% per
year, Marcus has been unsuccessful in sharing this growth. To increase its sales, the
firm is considering an aggressive marketing campaign that centers on regularly running
ads in all relevant trade journals and web sites and exhibiting products at all
major regional and national trade shows. The campaign is expected to require an
annual tax-deductible expenditure of $150,000 over the next 5 years. Sales revenue,
as shown in the accompanying income statement for 2015, totaled $20,000,000. If
the proposed marketing campaign is not initiated, sales are expected to remain at
this level in each of the next 5 years, 2016 through 2020. With the marketing
campaign, sales are expected to rise to the levels shown in the accompanying table
for each of the next 5 years; cost of goods sold is expected to remain at 80% of
sales; general and administrative expense (exclusive of any marketing campaign outlays)
is expected to remain at 10% of sales; and annual depreciation expense is expected
to remain at $500,000. Assuming a 40% tax rate, find the relevant cash
flows over the next 5 years associated with the proposed marketing campaign.