HADM 2250 Homework assignment 5

HADM 2250   Homework  assignment  5

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1.   You are evaluating two different silicon wafer milling machines. The Techron I costs $240,000, has a three-year life, and has pretax operating costs of $63,000 per year. The Techron II costs $420,000, has a five-year life, and has pretax operating costs of $36,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $40,000. If your tax rate is 35 percent and your discount rate is 10 percent, compute the EAC for both machines.

2.   Dahlia Enterprises needs someone to supply it with 120,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $870,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that in five years, this equipment can be salvaged for $70,000. Your fixed production costs will be $325,000 per year, and your variable production costs should be $10.30 per carton. You also need an initial investment  in net working capital of $75,000. If your tax rate is 35 percent and you require a 12 percent return on your investment, what bid price should you submit?

3.   Consider a project to supply 100 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,900,000 five years ago; if the land were sold today, it would net you $2,100,000 aftertax. The land can be sold for $2,300,000 after taxes in five years. You will need to install $5.4 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment  will be depreciated straight-line to zero over the project’s five-year life. The equipment can be sold for $500,000 at the end of the project. You will also need $600,000 in initial net working capital for the project, and an additional investment of $50,000 in every year thereafter. Your production costs are 0.5 cents per stamp, and you have fixed costs of $1,050,000 per year. If your tax rate is 34 percent and your required return on this project is 12 percent, what bid price should you submit on the contract?

4.   We are evaluating a project that costs $924,000, has an eight-year life, and has no salvage value.

Assume that depreciation  is straight-line to zero over the life of the project. Sales are projected at

75,000 units per year. Price per unit is $46, variable cost per unit is $31, and fixed costs are $825,000

per year. The tax rate is 35 percent, and we require a 15 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures.

5.   You are considering a new product launch. The project  will cost $1,400,000, have a four-year life, and have no salvage value; depreciation  is straight-line to zero. Sales are projected at 180 units per year; price per unit  will be $16,000, variable cost per unit  will be $9,800, and fixed costs will be

$430,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 35 percent.

a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios?