8. Profitability Index
A project has an initial cost of $35,000, expected net cash inflows of $9,000 per year for 6 years, and a cost of capital of 8%. What is the project’s PI? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to two decimal places.
Answer: 9. Discounted Payback
A project has an initial cost of $60,000, expected net cash inflows of $14,000 per year for 7 years, and a cost of capital of 13%. What is the project’s discounted payback period? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to two decimal places.
Answer: years
13. Project Cash Flow
The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:Projected sales$22 millionOperating costs (not including depreciation)$9 millionDepreciation $4 millionInterest expense $3 millionThe company faces a 25% tax rate. What is the project’s operating cash flow for the first year (t = 1)? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar.
Answer: $ 14. Net Salvage Value
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $10 million, of which 85% has been depreciated. The used equipment can be sold today for $4 million, and its tax rate is 25%. What is the equipment’s after-tax net salvage value? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.
Answer: $ 15. Replacement Analysis
Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $118,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,100 per year. It would have zero salvage value at the end of its life. The project cost of capital is 11%, and its marginal tax rate is 25%. Should Chen buy the new machine? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.
Answer: NPV: $
