1. (Answer in Excel) Calculating Nominal Cash Flow: Etonic Inc. is considering an investment of $365,000 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 $245,000 and $70,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3 percent. Etonic will used the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $45,000 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.
a. What is the project's total nominal cash flow from assets for each year?
2. Calculating NPV and IRR for a Replacement: A firm is considering an investment in a new machine with a price of $18 million to replace its existing machines. The current machine has a book value of $6 million and a market value of $4.5 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.7 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $250,000 in net working capital. The required return on the investment is 10 percent, and the tax rate is 30 percent. What are the NPV and IRR of the decision to replace the old machine?
3. Project Analysis and Inflation: Sanders Enterprises, Inc. has been considering the purchase of a new manufacturing facility for $270,000. The Facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the even years. Operating revenues from the facility are expected to be $105,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $30,000, in nominal terms, and they are expected to increase at 6 percent per year. The real discount rate is 8 percent. The corporate tax rate is 34 percent. Sanders have other profitable operations.
a. Should the company accept the project? describe.