1) Bobo Manufacturing's crimping machine was purchased 5 years ago for $65,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $6,500 per year for each year of its remaining life. As older crimpers are still useful machines, this one can be sold for $19,500 at the end of its useful life. A new, high-efficiency, digital-controlled crimper can be purchased for $120,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $30,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. Straight-line depreciation will be used over its 5-year life. The old machine can be sold today for $35,000. The firm’s tax rate is 35%, and the appropriate WACC is 16%.
What is the NPV of this project? Should Bobo replace the crimper?
2) Today, it is 2025 and Uber is planning on purchasing 500 self-driving cars for the San Francisco market. They have their choice of two models, a Tesla and a GM. Each Tesla costs $75,000 and has maintenance expenses of $5,000 a year because of the heavy use they receive. The GM only costs $60,000, but has maintenance expenses of $6,000 per year. The Tesla is expected to have a productive life of 5 years, after which it will have a salvage value of zero. (The battery disposal is very expensive) The GM is expected to have a productive life of 3 years with zero value afterwards. Each car will be depreciated straight-line over its productive life to a zero salvage value. Uber's marginal tax rate is 40% and the appropriate discount rate is 13%. Which car should they choose? Show your work to receive any partial credit.
3) Bilbo Baggins is considering buying a company named Wind Resources (WR), which sells windmills all over Middle Earth. He has discovered, with Gandalf's help, a new way to manufacture wind turbines and wants to combine his new design with the production capabilities of WR. Over the last five years, Bilbo has spent countless time in the lab developing the design and has spent $200,000 on computer simulations and other research expenses.
The purchase of WR will cost $500,000 plus an additional $500,000 of new eqiupment. It will also require an investment in working capital of $50,000.
With the new designs, WR is expected to generate annual sales of $350,000 with associated expenses of $140,000. Assume the plant and equipment can be depreciated straight-line over 20 years, even though Bilbo expects to sell the plant to Frodo at the end of 5 years for $900,000. The firm's marginal tax rate is 35% and Bilbo's required rate of return for WR is 12%. Should he make the purchase? You must show your work to receive any partial credit.