XYZ Inc. is deciding whether to buy a new building. The building will increase cash flows by $5,000,000 per year. The building has a 10-year and will be obsolete 10 years from today. The building is current priced. $15 million. The cost of the building will decline by $2,500,000 per year until it reaches 5 million, where it remains until it is obsolete. The require rate of return is 10%. Calculate the NPV of the project assuming the project is started today. (Round to 2 decimals) Assuming XYZ is willing to wait and risk not being able to acquire the

XYZ Inc. is deciding whether to buy a new building. The building will increase cash flows by $5,000,000 per year. The building has a 10-year and will be obsolete 10 years from today. The building is current priced. $15 million. The cost of the building will decline by $2,500,000 per year until it reaches 5 million, where it remains until it is obsolete. The require rate of return is 10%. Calculate the NPV of the project assuming the project is started today. (Round to 2 decimals) Assuming XYZ is willing to wait and risk not being able to acquire the

Name: ff2 XYZ Inc. is deciding whether to buy a new building. The building w
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Description: ff2 XYZ Inc. is deciding whether to buy a new building. The building willincrease cash flows by $5,000,000 per year. The building has a 10-year lifeand will be obsolete 10 years from today. The building is current priced at$15 million. The cost of th

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
Markoff Products is considering two competing projects, but only one will be selected. Project A requires an initial investment of $42,000 and is expected to generate future cash flows of $6,000 for each of the next 50 years. Project B requires an initial investment of $210,000 and will generate $30,000 for each of the next 10 years. If Markoff requires a payback of 8 years or less, which project should it select based on payback periods?
Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of $25 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company’s cost of capital is 12%. By how much would the value of the company increase if it accepted the better project (plane)? What is the equivalent annual annuity for each plane?
Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.
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Washington-Pacific (W-P) invested $4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at an expected price of $8 million. What is W-P’s expected rate of return?