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OSU ACCTMIS 2300 - CAPBUD Lecture Problems

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Capital Budgeting (CAPBUD) – Lecture Problems Pg 1 CAPITAL BUDGETING (CAPBUD) Lecture Problems Example #1 (module 2) M.T. Glass, Inc. is contemplating the purchase of a machine capable of performing certain operations that are now performed manually. The machine will cost $6,000 new, and it will last for five years. At the end of the five year period, the machine will have a $1,000 salvage value. Use of the machine will reduce labor costs by $2,000 per year. M.T. Glass employs a cost of capital of 20% on all investment projects. REQUIRED: Calculate the net present value for this project. Should the project be accepted? Example #2 (module 2) Under a special licensing agreement, Betty DeRose, Inc. has an opportunity to market a new product in the western United States for a five-year period. The product would be purchased from the manufacturer, with Betty DeRose, Inc. responsible for all costs of promotion and distribution. After a careful study, Betty DeRose has estimated the following costs and revenues associated with the new product: Cost of Equipment Needed Now ............................ $ 64,000 Working Capital Needed Now ............................... 100,000 Salvage Value of Equipment in Five Years ........... 10,000 Overhaul of Equipment in Four Years ................... 5,000 Annual Net Cash Inflows ....................................... 40,000 Cost of Capital ....................................................... 20% At the end of the five year period, the working capital needed now would be released for investment elsewhere. REQUIRED: Calculate the net present value for this project. Should the project be undertaken?Capital Budgeting (CAPBUD) – Lecture Problems Pg 2 Example #3 (module 5) M.T. Glass, Inc. is considering purchasing a new machine. The machine has a cost of $20,000 and is expected is reduce operating costs for the next five years as follows: Reduction in Costs Year 1 ………… $ 9,000 Year 2 ………… 6,000 Year 3 ………… 7,000 Year 4 ………… 6,000 Year 5 ………… 5,000 It is estimated that the machine will need repairs at the end of year 2 and at the end of year 4. The repairs are expected to cost $5,000 each. REQUIRED: Calculate the payback period of this machine. Example #4 (module 6) M.T. Glass, Inc. owns the mineral rights to land on which there is a deposit of ore. The company is considering purchasing equipment and opening a mine on the property. The ore in the mine would be exhausted after 10 years of mining at which time the mine would be closed. After a careful study, M.T. Glass has estimated the following costs and revenues associated with this project: Cost of Equipment Needed ..................................... $ 300,000 Working Capital Needed Now .............................. 75,000 Salvage Value of Equipment in Ten Years ........... 100,000 Road Repairs Needed in Six Years ..................... 40,000 Annual Net Cash Inflows ...................................... 80,000 After-Tax Discount Rate ....................................... 12% Income Tax Rate .................................................... 30% At the end of the ten year period, the working capital needed now would be released for investment elsewhere. REQUIRED: Calculate the net present value of this


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OSU ACCTMIS 2300 - CAPBUD Lecture Problems

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