## 05 Jan Principles of Finance

Principles of Finance:

Winnebagel Corp. currently sells 35,000 motor homes per year at \$73,000 each, and 14,500 luxury motor coaches per year at \$110,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 30,000 of these campers per year at \$16,500 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,300 units per year, and reduce the sales of its motor coaches by 1,000 units per year. What is the amount to use as the annual sales figure when evaluating this project? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)

Annual sales \$
A five-year project has an initial fixed asset investment of \$335,000, an initial NWC investment of \$35,000, and an annual OCF of −\$34,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 10 percent, what is this project’s equivalent annual cost, or EAC?(Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Equivalent annual cost \$
Romo Enterprises needs someone to supply it with 121,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you \$880,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that, in five years, this equipment can be salvaged for \$71,000. Your fixed production costs will be \$326,000 per year, and your variable production costs should be \$10.40 per carton. You also need an initial investment in net working capital of \$76,000. If your tax rate is 30 percent and you require a return of 11 percent on your investment, what bid price should you submit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Bid price \$
Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for \$490,000 is estimated to result in \$200,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of \$82,000. The press also requires an initial investment in spare parts inventory of \$22,000, along with an additional \$2,700 in inventory for each succeeding year of the project. The shop’s tax rate is 34 percent and its discount rate is 10 percent. MACRS schedule

Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV \$

Should the company buy and install the machine press?

Yes
No

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