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Maine Corp. is considering the purchase of a major piece of equipment for its manufacturing plant. The project would cost $20 million in initial investment and would result in a cost savings, before tax, of 3.25 million per year for 5 years. The equipment could be sold for 4.5 million at the end of the 5 years. The equipment would also result in an increase in NWC or $140,000, which will be recovered at the end of the project. The Company's CCA rate is 22% and the corporate tax rate is 40%.

If Maine Corps WACC is 7%, should they proceed with the project?

Maine Inc. Purchased an area of land last year for 2.5 million. At that time the company spend $75,000 in legal fees and $200,000 to have the site graded. The company borrowed to buy the land and now has interest costs of $20,000 per year. The company now has the choice of building one large factory on the site or a strip mall containing several smaller stores. What costs identified above should be included in the capital budgeting analysis?

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Deanna Hettinger
Deanna HettingerLv2
28 Sep 2019

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Should Bethesda complete the project based on the following inputs and outputs of the project and its required rate of return? “Calculate the payback period, profitability index, net present value, and internal rate of return for the new strip mine.” (Ross, Westerfield, & Jaffe, 2013)

Numbers given:

PROPOSED 4 years

CONTRACT: 500,000 tons of coal per year at $82 per ton

PRODUCTION: Coal production would produce the following for 4 years, in order 620,000 tons 680,000 tons 730,000 tons 590,000 tons Variable cost: $31 per ton Fixed cost: $4.1 million per year Net working capital investment of 5% of sales to be built up in the year prior to sales Excess production can be sold on spot market for $76 per ton

LAND: Purchased for $5 million (10 years ago) Could sell for after-tax profit of $5.5 million If mined, land legally must be reclaimed: cost $2.7 million (this would be done year 5) If mined, land will be donated as Public Park with deduction of $6 million (year 6)

EQUIPMENT: cost $85 million Use 7-year MACRS depreciation schedule Equipment can be sold for 60% of its purchase price (after the 4-year contract is complete) However, Bethesda will use equipment in its next project

TAX RATE: 38% (assume that a loss in any year will result in a tax credit)

REQUIRED RETURN: 12%

Please show all calculations. Thank you.

Consider a project to supply 100 million postage stamps per year to the USPS for the next five years. You have an idle parcel of land available that cost $850,000 five years ago; if the land were sold today it would net you $1,080,000 aftertax. The land can be sold for $1,150,000 after taxes in five years. You will need to install $4.6 million in new manufacturing plant and equipment to produce the stamps; the plant and equipment will be depreciated straight-line to zero over the projects five-year life. the equipment can be sold for $400,000 at the end of the project. You will also need $600,000 in inital net working capital for the project and an additional investment of $50,000 in every year thereafter. Your production costs are 0.45 dollars per stamp, and you have fixed costs of $1,200,000 per year. If your tax rate is 34% and your required return on this project is 12%, what bid should you submit on the contract?

Consider a project to supply 103 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,930,000 five years ago; if the land were sold today, it would net you $2,130,000 aftertax. The land can be sold for $2,330,000 after taxes in five years. You will need to install $5.43 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project’s five-year life. The equipment can be sold for $530,000 at the end of the project. You will also need $630,000 in initial net working capital for the project, and an additional investment of $53,000 in every year thereafter. Your production costs are 0.53 cents per stamp, and you have fixed costs of $1,080,000 per year. If your tax rate is 34 percent and your required return on this project is 12 percent, what bid price should you submit on the contract?

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