Question: The Smith Pie Company is considering two

> Hayward Enterprises, a successful imaging products firm, is considering expanding into the lucrative laser-engraved self-portrait business. It is expected that this new business will generate first-year revenues of $2 million. These revenues are expected

> Hurley’s Winery is planning to acquire a new grape masher. The masher will cost $100,000 including shipping and installation and will be depreciated as a seven-year MACRS asset. At the time the masher is purchased, Hurley will have to invest $5,000 in ne

> Steber Packaging Inc. expects sales next year of $50 million. Of this total, 40 percent is expected to be for cash and the balance will be on credit, payable in 30 days. Operating expenses are expected to total $25 million. Accelerated depreciation is ex

> Clyne Industries wants to market its new Slammin Jammin Basketball Goal Set. To bring this product to the market will require the purchase of equipment costing $650,000. Shipping and installation expenses associated with the equipment are estimated to be

> Locus Quintatus, Inc., a highly profitable maker of customized chariots, is planning to introduce a new model shortly. The firm must purchase equipment immediately at a cost of $900,000. Freight and installation costs for this equipment will be $100,000.

> Bratton Stone Works is considering an expansion proposal that will require an outlay of $1 million for land and $5 million for equipment. The equipment will be depreciated under MACRS rules as a seven-year class asset. The salvage value of the equipment

> Ralph’s Bow Works (RBW) is planning to add a new line of bow ties that will require the acquisition of a new knitting and tying machine. The machine will cost $1 million. It is classified as a seven-year MACRS asset and will be depreciated as such. Inter

> Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase of land at a cost of $100,000. A new building will cost $100,000 and will be depreciated on a straight-line basis over 20 years to a s

> Nguyen Inc. is considering the purchase of a new computer system (ICX) for $130,000. The system will require an additional $30,000 for installation. If the new computer is purchased, it will replace an old system that has been fully depreciated. The new

> A new machine costing $100,000 is expected to save the McKaig Brick Company $15,000 per year for 12 years before depreciation and taxes. The machine will be depreciated as a seven-year class MACRS asset. The firm’s marginal tax rate is 40 percent. What a

> The Vaderson Forecasting Associates sells a broad range of economic forecasting services to businesses and government agencies. One of its primary products is the Vaderson Exchange Rate Seer, a model that forecasts future spot exchange rates. Finley Inco

> Benford Inc. is planning to open a new sporting goods store in a suburban mall. Benford will lease the needed space in the mall. Equipment and fixtures for the store will cost $200,000 and be depreciated over a five-year period on a straight-line basis t

> Two years ago Agro Inc., purchased an ACE generator that cost $250,000. Agro had to pay an additional $50,000 for delivery and installation, and the investment in the generator required the firm to increase its net working capital position by $25,000. Th

> Nguyen Inc. is considering the purchase of a new computer system (ICX) for $130,000. The system will require an additional $30,000 for installation. If the new computer is purchased, it will replace an old system that has been fully depreciated. The new

> Five years ago, the Mori Foods Company acquired a bean processing machine. The machine cost $30,000 and is being depreciated using the straight-line method over a 10-year period to an estimated salvage value of $0. A new, improved processor is now availa

> A firm has an opportunity to invest in a new device that will replace two of the firm’s older machines. The new device costs $570,000 and requires an additional outlay of $30,000 to cover installation and shipping. The new device will cause the firm to i

> The Taylor Mountain Uranium Company currently has annual cash revenues of $1.2 million and annual cash expenses of $700,000. Depreciation amounts to $200,000 per year. These figures are expected to remain constant for the foreseeable future (at least 15

> The Jacob Chemical Company is considering building a new potassium sulfate plant. The following cash outlays are required to complete the plant: Year………….Cash Outlay 0…….……….$4,000,000 1……………….2,000,000 2………………….500,000 Jacob’s cost of capital is 12 pe

> A new machine costing $100,000 is expected to save the McKaig Brick Company $15,000 per year for 12 years before depreciation and taxes. The machine will be depreciated on a straight-line basis for a 12-year period to an estimated salvage value of $0. Th

> Johnson Products is considering purchasing a new milling machine that costs $100,000. The machine’s installation and shipping costs will total $2,500. If accepted, the milling machine project will require an initial net working capital investment of $20,

> The Cooper Electronics Company has developed the following schedule of potential investment projects that may be undertaken during the next 6 months: a. If Cooper requires a minimum rate of return of 10 percent on all investments, which projects should

> On January 1, the cost of borrowing Hong Kong dollars (HKD) for 1 year was 18 percent. During the year the U.S. inflation rate was 2 percent and the Hong Kong inflation rate was 9 percent. The exchange rate on January 1 was HKD7/$. On December 31, the ex

> Calculate the annual straight-line depreciation for a machine that costs $50,000 and has installation and shipping costs that total $1,000. The machine will be depreciated over a period of 10 years. The company’s marginal tax rate is 40 percent.

> The MacCauley Company has sales of $200 million and total expenses (excluding depreciation) of $130 million. Straight-line depreciation on the company’s assets is $15 million, and the maximum accelerated depreciation allowed by law is $25 million. Assume

> What are some of the limitations of breakeven analysis? How can these limitations affect actual financial decision making?

> Explain how a linear breakeven chart is constructed when a firm’s selling price, variable costs per unit, and fixed costs are known.

> The Altoona Electric Company is considering refunding its $200 million, 12.5 percent debt issue with a 10 percent, 10-year debt issue. The existing (old) issue also matures in 10 years and now is callable at 104 percent of par. The unamortized issuance c

> The Phillipsburg Power Company is considering refunding its $250 million, 11.5 percent debt issue with a 10 percent, 15-year debt issue. The existing (old) issue also matures in 15 years and now is callable at 103.5 percent of par. The unamortized issuan

> The Springfield Gas and Electric Company is considering refunding $50 million of 11 percent debt with an 8 percent, 20-year debt issue. The existing, or old, issue also matures in 20 years and now is callable at 108 percent of par. The unamortized issuan

> The Warren Electric Company is considering refunding its $150 million, 12 percent debt issue with a 10 percent, 20-year debt issue. The existing (old) issue also matures in 20 years and now is callable at 105 percent of par. The unamortized issuance cost

> Use the option price calculator that can be found at www.numa.com, or another option price calculator, to test the sensitivity of option values to changes in the key input variables. Use the data from Problem 1 as the base case and vary the values for th

> Targezept Bionics Inc. has a common stock outstanding that sells for $21 per share. A call option on the stock has an exercise price of $20 and will expire in three months. Based on an analysis of the stock’s past volatility, you have estimated the stand

> The Jennette Corporation, a firm based in Mt. Pleasant, South Carolina, has an account payable with a British firm coming due in 180 days. The payable requires Jennette to pay £200,000. Winthrop Jennette, the firm’s founder

> The Covington Engine Company is considering opening a new plant facility to build truck engines. As part of a detailed analysis of the proposed facility, Covington’s management wants some information on the cash breakeven point. Fixed costs for the facil

> The current price per unit for shock absorbers produced by Leveland Products is $25. The variable cost per unit is $10. Fixed costs are $600,000. a. What is the breakeven point in units? b. What is the DOL at the breakeven point? Explain what this valu

> Rodney Rogers, a recent business school graduate, plans to open a wholesale dairy products firm. Rogers expects first-year sales to total $5.50 million. He desires to earn a target pretax profit of $1 million during his first year of operation. Variable

> Francis Furniture has current fixed costs of $1 million. Francis’s only product, a rolltop desk, sells for $3,000. Variable operating costs per unit are $1,000. Francis plans to buy a new lathe that will produce a more precise roller for the desk. The la

> Logue Lock Company expects its fixed costs next year to be $750,000. The selling price for its lock is $40. Logue is considering the purchase of new equipment that is expected to reduce unit variable costs from a current level of $25 to a new level of $2

> Vargo Industries has computed its breakeven level of output to be 25,000 units. Based on forecasts from its sales force and past experience, expected unit sales are 32,000, with a standard deviation of 5,200. What is the probability that Vargo will have

> Jenkins Appliances produces microwave ovens. Jenkins has computed its breakeven level of sales to be 60,000 units. An analysis of the market has led Jenkins to expect sales of 75,000 units with a standard deviation of 10,000 units. Assume that sales are

> East Publishing Company is doing an analysis of a proposed new finance text. Using the following data, answer Parts a through e. Fixed Costs (per edition): Development (reviews, class testing, and so on)……………….$18,000 Copyediting……………………………………………………………

> Calculate the depreciation schedule for a $100,000 office building placed in service in October 2013.

> Calculate the MACRS depreciation schedule for a drill press that costs $148,000 and has installation and shipping costs of $2,000. The drill press is classified as a sevenyear MACRS asset.

> Shoesmith Wave Inc., a new and largely unproven economic forecasting service, expects the inflation rate in South Korea to average 9 percent per year over the next 5 years. In comparison, Shoesmith expects a U.S. inflation rate over this same period to b

> Calculate the annual MACRS depreciation for a $20,000 truck that qualifies as a five-year MACRS asset. The truck is estimated to have a $7,000 salvage value six years from now.

> a. Calculate the annual MACRS depreciation for a machine in the seven-year MACRS asset class, assuming that the asset costs $20,000. b. If you knew that the asset had an expected salvage value of $2,000 at the end of its 12-year economic life, would you

> Turbomachinery Parts Inc. is considering two mutually exclusive equipment investments that would increase its production capacity. The firm uses a 14 percent required rate of return to evaluate capital expenditure projects. The two investments have the f

> Germania Corporation is considering replacing its plant cooling unit. The existing unit has recently “died” and has no salvage value. Of the two competing cooling units, B has a long life but a higher initial cost than

> BC Minerals is considering a new production process. Two alternative pieces of equipment are available. Alternative P costs $100,000, has a 10-year life, and is expected to generate annual cash inflows of $22,000 in each of the 10 years. Alternative R co

> What method of depreciation would you prefer, MACRS or straight-line, if your objective is to maximize the present value of your firm’s cash flows?

> Calculate the MACRS depreciation schedule for a milling machine that costs $47,500 and has installation and shipping costs of $2,500. The milling machine is classified as a seven-year MACRS asset. The milling machine is estimated to have a salvage value

> Assuming that all other factors remain unchanged, determine how a firm’s breakeven point is affected by each of the following developments: a. The firm finds it necessary to reduce the price per unit because of competitive conditions in the market. b.

> How is the opportunity cost concept used in the capital budgeting process?

> As of today, the following information is available: Using this information, make three independent forecasts of the 1-year future spot rate for the Israeli shekel. (Use exact, not approximation, relationships.) United States Israel Real rate of in

> Distinguish between asset expansion and asset replacement projects. How does this distinction affect the capital expenditure analysis process?

> Why is it generally incorrect to consider interest charges when computing a project’s net cash flows?

> What are the potential tax consequences of selling an old asset in an asset replacement investment decision?

> Depreciation is a noncash expense; why is it considered when estimating a project’s net cash flows?

> What factors should be considered when estimating a project’s NINV?

> Cash flows for a particular project should be measured on an incremental basis and should consider all the indirect effects of the project. What does this involve?

> What are the primary types of capital investment projects? Does a project’s type influence how it is analyzed?

> What effect does capital rationing have on a firm’s ability to maximize shareholder wealth?

> What is a mutually exclusive investment project? An independent project? A contingent project? Give an example of each.

> Discuss how capital budgeting procedures might be used by each of the following: a. Personnel managers b. Research and development staffs c. Advertising executives

> Last year, the French marketing subsidiary of International Pharmaceuticals Corporation (IPC), a New Jersey–based drug manufacturer, earned 700,000 euros. This year, partly due to a weaker U.S. dollar, the French subsidiary will earn 900,000 euros. Last

> Benford Inc. is planning to open a new sporting goods store in a suburban mall. Benford will lease the needed space in the mall. Equipment and fixtures for the store will cost $200,000 and be depreciated to $0 over a 5-year period on a straight-line basi

> The Taylor Mountain Uranium Company currently has annual revenues of $1.2 million and annual expenses exclusive of depreciation of $700,000. Depreciation amounts to $200,000 per year. These figures are expected to remain constant for the foreseeable futu

> You have just been named the chief financial officer of Fabco, a large metal fabricator located in Chama, New Mexico. The company has long been a user of the net present value method for evaluating its investment projects. The firm undertakes all project

> International Foods Corporation, a U.S.-based food company, is considering expanding its soup-processing operations in Switzerland. The company plans a net investment of $8 million in the project. The current spot exchange rate is SF6.25 per dollar (SF ¼

> Project Alpha requires an outlay of $10,000 immediately. Project Alpha has a 1-year life and is expected to produce a net cash flow at the end of one year of $20,000. Project Beta, a mutually exclusive alternative to Alpha, requires an outlay of $20,000

> Seco Dame Enterprises (SDE) acquired a robotic saw six years ago at a cost of $10 million. The saw was depreciated to its current book value of $0. Actual salvage value today is estimated to be $2 million. SDE’s average tax rate is 30 percent, and its ma

> Commercial Hydronics is considering replacing one of its larger control devices. A new unit sells for $29,000 (delivered). An additional $3,000 will be needed to install the device. The new device has an estimated 20-year service life. The estimated salv

> Channel Tunnel Inc. plans to build an additional 23-mile-long tunnel under the English Channel for added train service. The cost (NINV) of the tunnel is expected to be $3.3 billion. Net cash inflows are expected to equal $651 million per year. How many y

> Note the following information on two mutually exclusive projects under consideration by Wang Food Markets, Inc. Wang requires a 14 percent rate of return on projects of this nature. a. Compute the NPV of both projects. b. Compute the internal rate o

> The Sisneros Company is considering building a chili processing plant in Hatch, New Mexico. The plant is expected to produce 50,000 pounds of processed chili peppers each year for the next 10 years. During the first year, Sisneros expects to sell the pro

> Mammouth Mutual Fund of New York has $5 million to invest in certificates of deposit (CDs) for the next six months (180 days). It can buy either a Philadelphia National Bank (PNB) CD with an annual yield of 4 percent or a Zurich (Switzerland) Bank CD wit

> What is the difference between an asset purchase and a stock purchase?

> Fred and Frieda have always wanted to enter the blueberry business. They locate a 50-acre piece of hillside in Maine that is covered with blueberry bushes. They figure that the annual yield from the bushes will be 200 crates. Each crate is estimated to s

> The L-S Mining Company is planning to open a new strip mine in western Pennsylvania. The net investment required to open the mine is $10 million. Net cash flows are expected to be +$20 million at the end of year 1 and +$5 million at the end of year 2. At

> Imperial Systems has $1 million available for capital investments during the current year. A list of possible investment projects, together with their net investments and net present values, is provided in the following table: a. Rank the various inves

> A $1,230 investment has the following expected cash returns: Year Net……………Cash Flow 1……………………………..$800 2……………………………….200 3………………………………..400 Compute the internal rate of return for this project.

> Commercial Hydronics is considering replacing one of its larger control devices. A new unit sells for $29,000 (delivered). An additional $3,000 will be needed to install the device. The new device has an estimated 20-year service life. The estimated salv

> Show that the internal rate of return of the following investment is 0, 100, and 200 percent: Net investment $ -1,000 Year 0 Net cash flows +6,000 Year 1 -11,000 Year 2 +6,000 Year 3

> Two mutually exclusive investment projects have the following forecasted cash flows: a. Compute the internal rate of return for each project. b. Compute the net present value for each project if the firm has a 10 percent cost of capital. c. Which pro

> A company is planning to invest $100,000 (before tax) in a personnel training program. The $100,000 outlay will be charged off as an expense by the firm this year (year 0). The returns from the program in the form of greater productivity and a reduction

> An acre planted with walnut trees is estimated to be worth $12,000 in 25 years. If you want to realize a 15 percent rate of return on your investment, how much can you afford to invest per acre? (Ignore all taxes and assume that annual cash outlays to ma

> Jefferson Products Inc. is considering purchasing a new automatic press brake, which costs $300,000 including installation and shipping. The machine is expected to generate net cash inflows of $80,000 per year for 10 years. At the end of 10 years, the bo

> Suppose the British short-term interest rate is 13 percent and the corresponding U.S. rate is 8 percent. Suppose at the same time that the discount on forward pounds is 3 percent per year. Do these conditions present an opportunity for covered interest a

> A machine that costs $8,000 is expected to operate for 10 years. The estimated salvage value at the end of 10 years is $0. The machine is expected to save the company $1,554 per year before taxes and depreciation. The company depreciates its assets on a

> A firm wishes to bid on a contract that is expected to yield the following after-tax net cash flows at the end of each year: Year Net………………………Cash Flow 1……………………………………$5,000 2……………….…………………….8,000 3……………….…………………….9,000 4…………….……………………….8,000 5………….………

> Calculate the net present value and profitability index of a project with a net investment of $20,000 and expected net cash inflows of $3,000 a year for 10 years if the project’s required return is 12 percent. Is the project acceptable?

> What are the primary types of real options in capital budgeting? Give examples of each type.

> What effect would you expect the use of MACRS depreciation rules to have on the acceptability of a project having a 10-year economic life but a 7-year MACRS classification?

> What major problems can you foresee in applying capital budgeting techniques to investments made by public sector and not-for-profit enterprises or organizations?

> What are the primary objectives of the investment project post-audit review?

> What are the primary strengths and weaknesses of the payback approach in capital budgeting?

> Describe how the profitability index approach may be used by a firm faced with a capital rationing investment funds constraint.

> When are multiple rates of return likely to occur in an internal rate of return computation? What should be done when a multiple rate of return problem arises?

> If the 1-year U.S. Treasury bill rate is 7.0 percent, the spot rate between U.S. dollars and British pounds is £1 = $1.69, and the 90-day forward rate is £1 = $1.68, what rate of interest is expected on British Treasury bills, assuming that interest rate

> When is it possible for the net present value and the internal rate of return approaches to give conflicting rankings of mutually exclusive investment projects?