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Fin 571 Week 3 Individual Homework

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FIN 571 Week 3 Individual Homework  
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Week 3 Homework & Solutions


Week 3 Individual Homework Submit Through Gradebook In Excel
Proforma Cash Flows
I- The Martinsen Company is considering the purchase of a chemical analysis machine.   Although the machine being considered will not produce any increase in sales revenues, it will result in before tax the reduction of labor costs by $35,000 per year.   The machine has a purchase price of $100,000, and it would cost an additional $5,000 to properly install this machine.   In addition, to properly operate this machine, inventory must be increased by $5,000.   This machine has an expected life of 10 years, after which it will have no salvage value.   Also, assume simplified straight line depreciation and that this machine is being depreciated down to zero, a 34 percent marginal tax rate, and a required rate of return of 15 percent.

1. What is the initial outlay associated with this project?
2. What are the annual after tax cash flows associated with this project, for years 1thru 9.
3. What is the terminal cash flow in year 10.
4. Should the machine be purchased? Ie Calculate NPV, IRR, MIRR CPI & Discounted Payback

2. NPV/IRR. A new computer system will require an initial outlay of $20,000 but it will increase the firm’s cash flows by $4,000 a year for each of the next 8 years. Is the system worth installing if the required rate of return is 9 percent? What if it is 14 percent?   How high can the discount rate be before you would reject the project?


3. Proforma Cash Flows & Valuation. The Gordon Company is considering starting up a new business line of paint.   The equipment required to produce the paint will cost $1,600,000.   It will cost an additional $200,000 to ship, install and prepare the equipment for operation.   The cost of materials in permanent working capital amount to $320,000.   They anticipate...

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