Leno Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $205,000. Leno is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 4 percent per year in perpetuity. The appropriate real discount rate for Leno is 11 percent. All net cash flows are received at year-end. What is the present value of the net cash flows from the company's operations?

Compact fluorescent lamps (CFLs) have become more popular in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent light bulb costs $.40 and lasts for 1,000 hours. A 15-watt CFL, which provides the same light, costs $3.15 and lasts for 12,000 hours. A kilowatt-hour is 1,000 watts for 1 hour. However, electricity costs actually vary quite a bit depending on location and user type. An industrial user in West Virginia might pay $.04 per kilowatt-hour whereas a residential user in Hawaii might pay $.25.

You require a return of 10 percent and use a light fixture 500 hours per year. What is the break-even cost per kilowatt-hour?


J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,300, including a set of eight chairs. The company feels that sales will be 2,000, 2,150, 2,700, 2,550, and 2,300 sets per year for the next five years, respectively. Variable costs will amount to 42 percent of sales, and fixed costs are $1.81 million per year. The new dining room table sets will require inventory amounting to 7 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of sales of 250 dining room table sets per year of the oak tables the company produces. These tables sell for $3,600 and have variable costs of 37 percent of sales. The inventory for this oak table is also 7 percent of sales. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $16 million. However, the excess production capacity means the company can produce the new table without buying the new equipment. The company controller has said that the current excess capacity will end in two years with current production. This means that if the company uses the current excess capacity for the new table, it will be forced to spend the $16 million in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3.3 million if purchased today, and $6.6 million if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 40 percent, and the required return for the project is 9 percent.