Lord Walder Frey Wedding Planner and Event Organizer, Inc., is looking at settin
ID: 2634684 • Letter: L
Question
Lord Walder Frey Wedding Planner and Event Organizer, Inc., is looking at setting up a new mega conference facility in The Twins City. The company bought some land six years ago for $4.9 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $5.2 million. The company wants to build its new conference facility on this land; the building will cost $12.4 million to build, and the site requires $760,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
2. Los Pollos Hermanos, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 million. The fixed asset (primarily, laundry machinery) will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,130,000 in annual sales, with costs of $825,000. The tax rate is 34 percent and the required return on the project is 11 percent. What is the project
2. Los Pollos Hermanos, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 million. The fixed asset (primarily, laundry machinery) will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,130,000 in annual sales, with costs of $825,000. The tax rate is 34 percent and the required return on the project is 11 percent. What is the project
Explanation / Answer
5) EAC = asset price X discount rate / 1- (1+discount rate)-number of periods
EAC for techtronicI = $228,000 X 0.08 / (1 - (1+0.08)-3
EAC for techtronic I = 88,471.64
EAC for techtronic II = $400,000 X 0.08 / 1 - (1+0.08)-5
EAC for techtronic II =100,182.58
The conclusion is prefer techtronic I because it has lower EAC.
Q 1) cost of the land today if Purchased $5,200,000.00 building cost $12,400,000.00 grading cost $760,000.00 Initial investment in fixed assets $18,360,000.00 Q2) initial fixed asset investment Depreciation per year annual sales costs tax rate return on project 2,850,000 950,000 $2,130,000 825000/3 = 275,000 per year 34% 11% cash flow per year (2,130,000 - 275,000 - 950,000 )X0.66 = 234,300 year cash flows discount rate present value of cash flows 0 2,850,000 1 597,300 0.901 538167.3 2 597,300 0.812 485007.6 3 597,300 0.731 436626.3 1459801.2 Net present value = -2,850,000 + 1459801.20 = -1,390,198.80 Q 3) Initial fixed asset investment MACRS Depreciation annual sales costs = $807,000/3 initial investment in net working capital salvage value tax rate 2820000 + net working capital(340,000)= 3,160,000 year 1 33.33% 939,906 $2,120,000 $269,000 $340,000 $230,000 30% year 2 44.45 1,253,490 $2,120,000 $269,000 Year3 straight line 940,000 $2,120,000 $269,000 year operating cash flows required return 12% present value of cash flows 0 -3,160,000 1 637,765.80 0.893 569524.8594 2 637,765.80 0.797 508299.3426 3 637,765.80 0.712 454089.2496 1531913.452 Net present value = -3,160,000+ 1,531,913.45 + present value of salvage value(163,760) NPV = -$1,464,326.55 Q4 Installed cost depreciation per year salvage value Pre taxcost savings per year initial investment in net working capital tax rate discount rate $460,000 92,000 66,000 $230,000 $25,000 30% 8% year cash flows discount rate 8% present value of cash flows 0 485,000 1 96,600 0.926 89451.6 2 96,600 0.857 82786.2 3 96,600 0.794 76700.4 4 96,600 0.735 71001 5 96,600 0.681 65784.6 385723.8 Net present value = -485,000+385,723.80 + 44,946 = -$ 54,330.20Related Questions
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