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## Summer Tyme, Inc., is considering a new 5-year expansion project that requires an initial fixed asset investment of \$1.242 million. The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which time it will be worthless. The project is estimated to generate \$1,104,000 in annual sales, with costs of \$441,600. If the tax rate is 32 percent and the required return on the project is 9 percent, the NPV for this project is \$___________.

1) Winnebagel Corp. currently sells 19,200 motor homes per year at \$28,800

2)

3)

4)

5)

6)

each, and 7,680 luxury motor coaches per year at \$54,400 each. The
company wants to introduce a new portable camper to fill out its product
line; it hopes to sell 13,440 of these campers per year at \$7,680 each. An
independent consultant has determined that if Winnebagel introduces the
new campers, it should boost the sales of its existing motor homes by 3,200
units per year, and reduce the sales of its motor coaches by 832 units per
year. The amount to use as the annual sales figure when evaluating this
project is \$____________.
Summer Tyme, Inc., is considering a new 5-year expansion project that
requires an initial fixed asset investment of \$5.778 million. The fixed asset
will be depreciated straight-line to zero over its 5-year tax life, after which
time it will be worthless. The project is estimated to generate \$5,136,000 in
annual sales, with costs of \$2,054,400. If the tax rate is 33 percent, the OCF
for this project is \$___________.
Summer Tyme, Inc., is considering a new 5-year expansion project that
requires an initial fixed asset investment of \$1.242 million. The fixed asset
will be depreciated straight-line to zero over its 5-year tax life, after which
time it will be worthless. The project is estimated to generate \$1,104,000 in
annual sales, with costs of \$441,600. If the tax rate is 32 percent and the
required return on the project is 9 percent, the NPV for this project is
\$___________.
Summer Tyme, Inc., is considering a new 3-year expansion project that
requires an initial fixed asset investment of \$1.404 million. The fixed asset
will be depreciated straight-line to zero over its 3-year tax life, after which
time it will have a market value of \$109,200. The project requires an initial
investment in net working capital of \$156,000. The project is estimated to
generate \$1,248,000 in annual sales, with costs of \$499,200. The tax rate is
32 percent and the required return on the project is 11 percent. The NPV for
this project is \$____________.
Dog Up! Franks is looking at a new sausage system with an installed cost
of \$904,800. This cost will be depreciated straight-line to zero over the
project’s 9-year life, at the end of which the sausage system can be scrapped
for \$139,200. The sausage system will save the firm \$278,400 per year in
pretax operating costs, and the system requires an initial investment in net
working capital of \$64,960. If the tax rate is 34 percent and the discount
rate is 11 percent, the NPV of this project is \$_______________.
Your firm is contemplating the purchase of a new \$1,764,000 computerbased order entry system. The system will be depreciated straight-line to
zero over its 5-year life. It will be worth \$157,500 at the end of that time.
You will save \$693,000 before taxes per year in order processing costs and

you will be able to reduce working capital by \$139,499 (this is a one-time
reduction). If the tax rate is 33 percent, the IRR for this project is
__________ percent.

7)
Consider a project to supply Detroit with 49,000 tons of machine screws annually for automobile production.
initial \$2,107,000 investment in threading equipment to get the project started; the project will last for 6 year
department estimates that annual fixed costs will be \$490,000 and that variable costs should be \$220 per ton
depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates
\$539,000 after dismantling costs. The marketing department estimates that the automakers will let the con
price of \$250 per ton. The engineering department estimates you will need an initial net working capi
\$441,000. You require a 15 percent return and face a marginal tax rate of 39 percent on this project.
a
.
b
.

The estimated OCF for this project is \$ and the NPV is \$_________.

Suppose you believe that the accounting department’s initial cost and salvage value projections are accur
±15 percent; the marketing department’s price estimate is accurate only to within ±9 percent; and
department’s net working capital estimate is accurate only to within ±6 percent. Your worst-case NPV
\$______ and your best-case NPV is \$.

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