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Presentation/PPT
27/08/2022
1)FAST TRACK BIKES, INC. IS THINKING OF DEVELOPING A NEW COMPOSITE ROAD BIKE. DEVELOPMENT WILL TAKE SIX YEARS AND THE COST IS $200,000 PER YEAR. ONCE IN PRODUCTION, THE BIKE IS EXPECTED TO MAKE $300,000 PER YEAR FOR 10 YEARS. ASSUME THE COST OF CAPITAL IS 10%.A)CALCULATE THE NPV OF THIS INVESTMENT OPPORTUNITY, ASSUMING ALL CASH FLOW OCCUR AT THE END OF EACH YEAR. SHOULD THE COMPANY MAKE THE INVESTMENT?B)BY HOW MUCH THE COST OF CAPITAL ESTIMATE DEVIATE TO CHANGE THE DECISION? ( HINT: USE EXCEL TO CALCULATE THE IRR.)C) WHAT IS THE NPV OF THE INVESTMENT IF THE CAPITAL IS 14%?2.OPENSEAS, INC. IS EVALUATING THE PURCHASE OF A NEW CRUISE SHIP. THE SHIP WOULD COST $500 MILLION, AND WOULD OPERATE FOR 20 YEARS. OPENSEAs EXPECTS ANNUL CASH FLOW FROM OPERATING THE SHIP TO BE $70 MILLION (AT THE END OF EACH YEAR) AND ITS COST OF CAPITAL IS 12%.A)PREPARE AN NPV PROFILE OF THE PURCHASE.B)ESTIMATE THE IRR (TO THE NEAREST 1%) FROM THE GRAPH.C)IS THE PURCHASE ATTRACTIVE BASED ON THESE ESTIMATES?’HOW FAR OFF COULD OPENSEAs’ cost of capital be (TO THE NEAREST 1%) BEFORE YOUR PURCHASE DECISION WOULD CHANGE?3.YOU ARE CONSIDERING TO MAKE A MOVIE. THE MOVIE IS EXPECTED TO COST $10 MILLION UPFRONT AND TAKE A YEAR TO MAKE. AFTER THAT, IT IS EXPECTED TO MAKE $5 MILLION WHEN IS IS RELEASED IN ONE YEAR AND $2 MILLION PER YEAR FOR THE FOLLOWING FOUR YEARS. WHAT IS THE PAYBACK PERIOD OF THIS INVESTMENT? IF YOU REQUIRE A PAYBACK PERIOD OF TWO YEARS, WILL YOU MAKE THE MOVIE? DOES THE MOVIE HAVE POSITIVE NPV IF THE COST OF CAPITAL IS 10%?4. MARKOV MANUFACTURING RECENTLY SPENT $15 MILLION TO PURCHASE SOME EQUIPMENT USED IN THE MANUFACTURE OF THE DISK DRIVES. THE FIRM EXPECTS THAT THIS EQUIPMENT WILL HAVE A USEFUL LIFE FOR FIVE YEARS, AND ITS MARGINAL CORPORATE TAX RATE IS 35%. THE COMPANY PLANS TO USE STRAIGHT-LINE DEPRECIATION.A)WHAT IS THE ANNUAL DEPRECIATION EXPENSE ASSOCIATED WITH THIS EQUIPMENT?B) WHAT IS THE ANNUAL DEPRECATION TAX SHIELD?C)RATHER THAN STRAIGHT-LINE DEPRECIATION, SUPPOSE MARKOV WILL USE THE MACRS DEPRECATION METHOD FOR FIVE-YEAR PROPERTY. CALCULATE THE DEPRECIATION TAX SHIELD EACH YEAR FOR THIS EQUIPMENT UNDER THIS ACCELERATED DEPRECIATION SCHEDULE.D)IF MARKOV HAS A CHOICE BETWEEN A STRAIGHT-LINE AND MACRS DEPRECIATION SCHEDULES, AND ITS MARGINAL CORPORATE TAX RATE IS EXPECTED TO REMAIN CONSTANT, WHICH SHOULD IT CHOOSE? WHY?E) HOW MIGHT YOUR ANSWER TO PART (D) CHANGE IF MARKOV ANTICIPATES THAT ITS MARGINAL CORPORATE TAX RATE WILL INCREASE SUBSTANTIALLY OVER THE NEXT FIVE YEARS?
1) Fast Track Bikes Inc.A)YearPV factorCashat 10%flows1 0.909090912 0.826446283 0.75131484 0.683013465 0.620921326 0.564473937 0.513158128 0.466507389 0.4240976210 0.3855432911…
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