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# REVIEW OF CAPITAL BUDGETING

1. The Kramer Tool Company has a photocopying machine that it purchased two years ago for \$70,000. The machine is being depreciated straight line over years to a !ero salvage value. " competing firm is years to a !ero offering a new photocopying machine that cost \$#0,000 and can be depreciated over

salvage value. Kramer has been assured that the new machine can be sold for \$10,000 after five years. The new machine re\$uires less maintenance and operator attendance and would result in cost savings of \$%0,000 annually. The firm selling the new machine has agreed to find a buyer who would pay \$&0,000 for the old machine. The discount rate is '( and the ta) rate is *+(. ,hould Kramer replace the old machine with the new one- ,upport your answer with appropriate calculations.

%. Kamal Copies .KC/ may buy a high volume machine that sells widgets. The machine costs \$100,000 and will be depreciated straight line over five years to a salvage value of \$% ,000. KC anticipates that the machine can actually be sold in five years for \$&#,000. The machine will generate sales of \$7 ,000 in year1 and sales will decline by \$ ,000 a year until year . 0)penses are +( of sales. The wor1ing capital position in the balance sheet is \$10,000 in year 0, \$1%,000 in year 1, \$1#,000 in year % till the end of year *. The wor1ing capital will be released at the end of the pro2ect. The marginal ta) rate is & ( and the discount rate is 10(. a. 3lease calculate the 435 of the pro2ectb. 3lease calculate the 677 of the pro2ectc. ,hould KC buy the machine3. Hasnains Fashions can invest \$6 million in a new plant for producing invisible makeup. The plant has an expected life of !ears" and expected sales are # million \$ars of makeup a !ear. Fixed costs are \$%. million a !ear" and variable costs are \$&.& per \$ar. The product will be priced at \$&.'( per \$ar. The plant will be depreciated straight)line over !ears to a salvage value of *ero. The opportunit! cost of capital is && percent" and the tax rate is 33 percent. a. +hat is pro\$ect ,-. under these base)case assumptions/ b. +hat is ,-. if variable costs turn out to be \$&.% per \$ar/ c. +hat is ,-. if fixed costs turn out to be \$&.( million per !ear/ d. 0t what price per \$ar would pro\$ect ,-. e1ual *ero/

2. 3i1dad 4unches is considering purchasing a new" energ! efficient grill. The grill cost \$25"555 and will be depreciated according to the 3 !ear 30678 schedule. 9t will be sold as scrap metal after three !ears for \$&5"555. The grill will have no effect on revenues but will save 3i1dad \$%5"555 a !ear in energ! expenses. The tax rate is 3 percent. a. +hat are the operating cash flows in :ears &)3/ b. +hat are the total cash flows in :ears &)3/ c. 9f the discount rate is &% percent" should the grill be purchased/

MACRS Table Year 1 2 3 4 5 6 3-Year 33.33 44.45 14.81 7.41 5-Year 20.00 32.00 19.20 11.52 11.52 5.76