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Calculating Project NPV Raphael Restaurant is considering the purchase of a \(\$ \mathbf{1 2 , 0 0 0}\) soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine will produce 1,900 soufflés per year, with each costing \(\$ 2.20\) to make and priced at \$5. Assume that the discount rate is 14 percent and the tax rate is 34 percent. Should Raphael make the purchase?

Calculating Salvage Value An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of \(\$ 8,400,000\) and will be sold for \(\$ 1,900,000\) at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset?

Calculating EAC You are evaluating two different silicon wafer milling machines. The Techron I costs \(\$ 270,000\), has a three-year life, and has pretax operating costs of \(\$ 45,000\) per year. The Techron II costs \(\$ 370,000\), has a five-year life, and has pretax operating costs of \(\$ 48,000\) per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of \(\$ 20,000\). If your tax rate is 35 percent and your discount rate is 12 percent, compute the EAC for both machines. Which do you prefer? Why?

Cost-Cutting Proposals Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for \(\$ 530,000\) is estimated to result in \(\mathbf{\$ 2 3 0 , 0 0 0}\) in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of \(\$ 70,000\). The press also requires an initial investment in spare parts inventory of \(\$ 20,000\), along with an additional \(\$ 3,000\) in inventory for each succeeding year of the project. If the shop's tax rate is 35 percent and its discount rate is 14 percent, should Massey buy and install the machine press?

Comparing Mutually Exclusive Projects Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs \(\$ 360,000\), has a four-year life, and requires \(\$ 105,000\) in pretax annual operating costs. System B costs \(\$ \mathbf{4 8 0 , 0 0 0}\), has a sixyear life, and requires \(\$ 65,000\) in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. If the tax rate is 34 percent and the discount rate is 11 percent, which system should the firm choose?

Inflation and Company Value Sparkling Water, Inc., expects to sell 2.1 million bottles of drinking water each year in perpetuity. This year each bottle will sell for \(\$ 1.25\) in real terms and will cost \(\$ .75\) in real terms. Sales income and costs occur at year-end. Revenues will rise at a real rate of 6 percent annually, while real costs will rise at a real rate of 5 percent annually. The real discount rate is 10 percent. The corporate tax rate is 34 percent. What is Sparkling worth today?

Calculating Nominal Cash Flow Etonic Inc. is considering an investment of \(\mathbf{\$ 0 5 , 0 0 0}\) in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be \(\$ 230,000\) and \(\$ 60,000\), respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3 percent. Etonic will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be \(\$ 40,000\) in nominal terms at that time. The one-time net working capital investment of \(\$ 10,000\) is required immediately and will be recovered at the end of the project. All corporate cash flows are subject to a 34 percent tax rate. What is the project's total nominal cash flow from assets for each year?

Cash Flow Valuation Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of \(\$ 155,000\). Phillips is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 5 percent per year in perpetuity. The appropriate real discount rate for Phillips is 11 percent. All net cash flows are received at year-end. What is the present value of the net cash flows from Phillips's operations?

Equivalent Annual Cost Bridgton Golf Academy is evaluating different golf practice equipment. The "Dimple-Max" equipment costs \(\$ 63,000\), has a three- year life, and costs \(\$ 7,500\) per year to operate. The relevant discount rate is 12 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of \(\$ 15,000\) at the end of the project's life. The relevant tax rate is 34 percent. All cash flows occur at the end of the year. What is the equivalent annual cost (EAC) of this equipment?

Calculating Project NPV Scott Investors, Inc., is considering the purchase of a \(\mathbf{\$ 4 5 0 , 0 0 0}\) computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be \(\$ 80,000\) in five years. The computer will replace five office employees whose combined annual salaries are \(\$ 140,000\). The machine will also immediately lower the firm's required net working capital by \(\$ 90,000\). This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 34 percent. Is it worthwhile to buy the computer if the appropriate discount rate is 12 percent?