Assignment

1. Assume a firm has earnings before depreciation and taxes of $500,000 and no depreciation. It is in a 40 percent tax bracket.

a.) Compute its cash flow.
b.) Assume it has $500,000 in depreciation. Recompute its cash flow.
c.) How large a cash flow benefit did the depreciation provide?

2. Assume a $200,000 investment and the following cash flows for two products:

Year               Product X   Product Y
1................... $60,000   $40,000
2................... 90,000    70,000
3................... 50,000    80,000
4................... 40,000    20,000

Which alternative would you select under the payback method?

3. You buy a new piece of equipment for $11,778, and you receive a cash inflow of $2,000 per year for 10 years. What is the internal rate of return?

4. The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $45,000. The annual cash flows have the following projections:

Year         Cash Flow
1............... $15,000
2............... 20,000
3............... 25,000
4............... 10,000
5............... 5,000

a.) If the cost of capital is 10 percent, what is the net present value of selecting a new machine?
b.) What is the internal rate of return?
c.) Should the project be accepted? Why?