Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 12, Problem 9P
Summary Introduction
To compute: The
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Bermuda Co. must choose between gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $110,000, whereas the gas powered truck will cost $40,000. The required rate of return that applies to both investments is 14 percent. The life for both types of truck is estimated be 12 years, during which time the net cash flows for the electric-powered truck will be $23,500 per year and those for gas-powered truck will be $10,000 per year. Calculate the NPV and IRR for each type of truck, and decide which to recommend.
Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $23,000, whereas the gas-powered truck will cost $17,100. The cost of capital that applies to both investments is 11%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,500 per year, and those for the gas-powered truck will be $4,750 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places.
1. CASE STUDY
Giangelo Corporation would like to venture in manufacturing a specialized tool that is required by a semi-
conductor company. In order to accomplish this, it is considering two options that both require raising
large amount of funds. First option (Project X) is the construction of a factory building and acquisition of
machineries for an estimated cost of P30 million. The other alternative (Project Y) is the acquisition of an
existing company that manufactures the same tool at a price of P50 million.
In order to fund the project, the Company will have to apply for a loan from a bank and issue shares of
stocks. The management contemplated a more leveraged approach by availing the 70% of the financial
requirements through loan borrowing and the rest from the issuance of shares. The interest on bank loan
is at 11% per annum while the issuance of shares will require return to stockholders at 8% per annum.
The applicable income tax rate is 25%.
Both of the projects will have…
Chapter 12 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 12 - What types of projects require the least detailed...Ch. 12 - Prob. 3QCh. 12 - Prob. 4QCh. 12 - Prob. 5QCh. 12 - A project has an initial cost of 40,000, expected...Ch. 12 - IRR Refer to Problem 12-1. What is the projects...Ch. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6P
Ch. 12 - Your division is considering two investment...Ch. 12 - Edelman Engineering is considering including two...Ch. 12 - Prob. 9PCh. 12 - Project S has a cost of $10,000 and is expected to...Ch. 12 - Prob. 11PCh. 12 - After discovering a new gold vein in the Colorado...Ch. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - The Pinkerton Publishing Company is considering...Ch. 12 - Shao Airlines is considering the purchase of two...Ch. 12 - The Perez Company has the opportunity to invest in...Ch. 12 - Filkins Fabric Company is considering the...Ch. 12 - The Ulmer Uranium Company is deciding whether or...Ch. 12 - The Aubey Coffee Company is evaluating the...Ch. 12 - Your division is considering two investment...Ch. 12 - The Scampini Supplies Company recently purchased a...Ch. 12 - You have just graduated from the MBA program of a...Ch. 12 - Prob. 2MCCh. 12 - Define the term “net present value (NPV).” What is...Ch. 12 - Prob. 4MCCh. 12 - Prob. 5MCCh. 12 - What is the underlying cause of ranking conflicts...Ch. 12 - Prob. 7MCCh. 12 - Prob. 8MCCh. 12 - Prob. 9MCCh. 12 - Prob. 10MCCh. 12 - In an unrelated analysis, you have the opportunity...Ch. 12 - Prob. 12MC
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- Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below. Alternative X Alternative Y $ 52,000 Materials costs Processing costs $ 75,800 $ 57,100 $ 57,100 Equipment rental $ 21,200 $ 21,200 Occupancy costs $ 20,400 $ 30,000 What is the financial advantage (disadvantage) of Alternative Y over Alternative X? Multiple Choice O O O $(33,400) $(167,400) $184,100 $150,700arrow_forwardAdidas is evaluating a proposal for a new product. If they launch the product, they will use an existing facility in the production process, which they previously acquired for $4 million. They currently lease it to a third party, and they expect to continue to do so if they don't use it for the new product. They rent it out for $102,000 and they expect that to remain flat for the foreseeable future. The project requires immediate investment in CAPX of $1.3 million, which will be depreciated on a straight-line basis over the next 10 years for tax purposes. The project will end after eight years, at which time they expect to salvage some of the initital CAPX and sell it for $469,000. The project requires immediate working capital investments equal to 10% of predicted first-year sales. After that, working capital will remain at 10% of the following year's expected sales. They expect sales to be $4.6 million in the first year and to stay constant for eight years. Total…arrow_forwardCASE STUDY Giangelo Corporation would like to venture in manufacturing a specialized tool that is required by a semi-conductor company. In order to accomplish this, it is considering two options that both require raising large amount of funds. First option (Project X) is the construction of a factory building and acquisition of machineries for an estimated cost of P30 million. The other alternative (Project Y) is the acquisition of an existing company that manufactures the same tool at a price of P50 million. In order to fund the project, the Company will have to apply for a loan from a bank and issue shares of stocks. The management contemplated a more leveraged approach by availing the 70% of the financial requirements through loan borrowing and the rest from the issuance of shares. The interest on bank loan is at 11% per annum while the issuance of shares will require return to stockholders at 8% per annum. The applicable income tax rate is 25%. Both of the projects will have…arrow_forward
- Two currently owned machines are being considered for the production of a part. The capital investment associated with the machines is about the same. The important differences between the machines are their production capacities (production rate × available production hours) and their reject rates (percentage of parts produced that cannot be sold). The material cost is P300.00 per part, and all defect-free parts produced can be sold for P600 each. (Rejected parts have negligible scrap value.) For either machine, the operator cost is P750.00 per hour and the variable overhead rate for traceable costs is P250.00 per hour. Considering the table below: MACHINE A: Production rate: 100 parts/hr Hours available for production: 7hrs/day Percent parts rejected: 10% MACHINE B: Production rate: 130 parts/hr Hours available for production: 6hrs/day Percent parts rejected: 15% What is the profit per day of Machine A? What is the profit per day of Machine B?arrow_forwardDavis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric- powered truck will cost more, but it will be less expensive to operate; it will cost 22,000, whereas the gas-powered truck will cost 17,500. The cost of capital that applies to both investments is 12 percent. The life for each type of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be 6,290 per year and those for the gas-powered truck will be 5,000 per year. Annual net cash flows include depreciation expenses. Required Calculate the NPV and IRR for each type of truck, and decide which to recommend.arrow_forwardDavis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric- powered truck will cost more, but it will be less expensive to operate; it will cost 22,000, whereas the gas-powered truck will cost 17,500. The cost of capital that applies to both investments is 12 percent. The life for each type of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be 6,290 per year and those for the gas-powered truck will be 5,000 per year. Annual net cash flows include depreciation expenses. Required Calculate the NPV for each type of truck, and decide which to recommend.arrow_forward
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