EMBERY MBAA518 4.4 - Problem Set 4

Question 1

15 / 15 pts

Tocserp is considering the purchase of a new machine that will produce widgets. The widget maker will require an initial investment of $12,000 and has an economic life of five years and will be fully depreciated by the straight line method. The machine will produce 1,600 widgets per year with each costing $2.00 to make. Each will be sold at $4.50. Assume Tocserp uses a discount rate of 14 percent and has a tax rate of 34 percent. What is the NPV of the project and should Tocserp make the purchase.

No, NPV = -135.27

No, NPV = -2240.54

Yes, NPV = 1732.32

Question 2

20 / 20 pts

Your firm’s discount rate is 15 percent. You are considering the purchase of Truck A or Truck B. Truck A costs $100, has a useful life of 3 years, no salvage value and maintenance costs of $10 per year. Truck B costs $80, has a useful life of 2 years, no salvage value and maintenance costs of $15 per year. Which truck should you select and why?

Truck A because the EAC of -53.8 is less than Truck B’s EAC of -64.2

Truck A because the NPV of 123 if larger than B’s NPV of 104

Truck B because the EAC of 64.2 is greater than Truck A’s EAC of 53.8

Question 3

0 / 25 pts

A business opportunity has presented itself to you and one of your classmates. Your opportunity is to enter the fast growing craft beer industry. Your projected sales in the first year is 8300 kegs. Your projected growth rate is 5 percent. Entering the business will require $35,000 of net working capital. Total fixed costs are $95,000. Variable production costs are $36 per keg and keg sales are priced at $57 each. The equipment to begin production is $175,000. The equipment will be depreciated using straight line depreciation over a five year life and has no salvage value. The tax rate is 35 percent and the required return is 25 percent. What is the NPV of the project and should you pursue the project?

- $2,082.17 No, do not take the project.

$17,422.51 Yes, take the project.

You did not include the growth of your variable costs.