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.
Sunk costs and opportunity costs - Masters Golf Products, Inc,, spent 3 years and $1000,000 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 of the known relevant cash flows on a time line.
Book value and taxes on sales assets Troy Industries purchased a new machine 3 years ago for $80,000. It is being depreciated under MACRS with a five year recovery period using the percentages given in Table 4.2. Assume a 40% tax rate.
a). What is the book value of the machine?
b). Calculate the firms tax liability if it sold the machine for each of the following amounts: $100,000, $56, 000, $23,300, and $15,000.
Incremental operating cash flows Richard and Linda Thomson operates a local lawn maintenance services for commercial and residential property. They have been using a John Deer riding mower for the past several years and believe that it is time to buy a new one. They would like to know the incremental (relevant) cash flows associated with the replacement of the old riding mower. The following data are available.
There are five years remaining useful life on the mower. The old mower has zero book value. The new mower is expected to last 5 years. The Thompsons will follow a 5 year MACRS recovery period for the new mower. Depreciation value of the new mower is $1,800. They are subject to a 40% tax rate. The new mower is expected to be mower fuel efficient, maneuverable, and durable than the previous models and can result in reduced operating expense of $500 per year. The Thompsons will buy a maintenance contract that calls for annual payments of $120. Create an incremental operating cash flow statement for the replacement of Richard and Linda�s John Deer riding mower. Show the incremental operating cash flow for the next six years.
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 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 income statement for 2003 (below), 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, 2004–2008. 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.