1. Basic capital budgeting problem with straight line
depreciation. The Roberts company has cash inflows of $140,000 per
year on project A and cash outflows of $100,000 per year. The
investment outlay on the project is $100,000. Its life is 10 years.
The tax rate is 40%. The opportunity cost of capital is 12%. a.
Present two alternative formulations of the net cash flows adjusted
for the depreciation tax shelter. b. Calculate the net present
value for project A, using straight line depreciation for tax
purposes.
2. Basic replacement problem. The Virginia company is
considering replacing a riveting machine with a new design that
will increases earnings before depreciation from $20,000 per year
to $51,000 per year. The new machine will cost $100,000 and has an
estimated life of eight years, with no salvage value. The
applicable corporate tax rate is 40% and the firms cost of capital
is 12%. The old machine has been fully depreciated and has no
salvage value. Should it be replaced with a new machine?
3. Calculate the internal rate of return for the following set
of cash flows: t1: 400 t2: 400 t3: -1,000 If the opportunity cost
of capital is 10%, should the project be accepted?
4. The Ambergast Corporation is considering a project that has a
three-year life and costs $1,200. It would save $360 per year in
operating costs and increase revenue by $200 per year. It would be
financed with a three-year loan with the following payment schedule
(the annual rate of interest is 5%):
Payment Interest Repayment of
Principal Balance
440.65 60.00
380.65 819.35
440.65 40.97
399.68
419.67
440.65 20.98
419.67
0
121.95 1,200.00
If the company has a 10% after tax weighted average cost of
capital, has a 40% tax rate, and uses straight-line depreciation,
what is the net present value of the project?