Quick Computing currently sells 15 million computer chips each year at a price of $18 per chip. It is about to introduce a new chip, and it forecasts annual sales of 23 million of these improved chips at a price of $23 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 8 million per year. The old chips cost $9 each to manufacture, and the new ones will cost $11 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip? (Enter your answer in millions.)
Cash flow= ______ million
Tubby Toys estimates that its new line of rubber ducks will generate sales of $6.40 million, operating costs of $3.40 million, and a depreciation expense of $0.40 million. If the tax rate is 40%, what is the firm's operating cash flow? (Enter your answer in millions rounded to 2 decimal places.)
Firm's operating cash flow=_________million
Laurel's Lawn Care, Ltd., has a new mower line that can generate revenues of $165,000 per year. Direct production costs are $55,000, and the fixed costs of maintaining the lawn mower factory are $22,500 a year. The factory originally cost $1.10 million and is being depreciated for tax purposes over 20 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm's tax bracket is 35%. (Enter your answer in dollars not in millions.)
Operating cash flows=________
Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $60,000 and sell its old low-pressure glueball, which is fully depreciated, for $10,000. The new equipment has a 10-year useful life and will save $14,000 a year in expenses. The opportunity cost of capital is 11%, and the firm's tax rate is 40%. What is the equivalent annual savings from the purchase if Gluon uses straight-line depreciation? Assume the new machine will have no salvage value. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Equivalent annual savings=_________
Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $39,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $9,750. The grill will have no effect on revenues but will save Johnny's $19,500 in energy expenses per year. The tax rate is 30%. Use the MACRS depreciation schedule.
a. What are the operating cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Year Operating Cash Flows
1 ?
2 ?
3 ?
b. What are the total cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Time Total Cash Flows
0 ?
1 ?
2 ?
3 ?
c. If the discount rate is 10%, should the grill be purchased?
PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $140 million on equipment with an assumed life of 5 years and an assumed salvage value of $25 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $100 million. A new modem pool can be installed today for $210 million. This will have a 3-year life and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $24 million per year and decrease operating costs by $12 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm's tax rate is 35% and the discount rate for projects of this sort is 12%.
a. What is the net cash flow at time 0 if the old equipment is replaced? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
Net Cash Flow=________million
b. What are the incremental cash flows in years 1, 2, and 3? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
Incremental cash flow=__________ million per year
c. What are the NPV and IRR of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places. Enter the IRR as a percent rounded to 2 decimal places.)
NPV=_______ million
IRR=_____%