# Fin200 hw assignment

Homework #6

1. Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon tire bike, selling for \$90 with a production and shipping cost of \$35. The company is thinking of introducing an off-road bike with a projected selling price of \$410 and a production and shipping cost of \$360. The projected annual sales for the off-road bike are 12,000. The company will lose sales in fat-tire bikes of 8,000 units per year if it introduces the new bike, however. What is the erosion cost from the new bike? Should Fat Tire start producing the off-road bike?

2. Revolution Records will build a new recording studio on a vacant lot next to the operations center. The land was purchased five years ago for \$450,000. Today the value of the land has appreciated to \$780,000. Revolutionary Records did not consider the value of the land (it had already spent the money to acquire the land long before this project was considered). The NPV of the recording studio was \$600,000. Should Revolution Records consider the land as part of the cash flow of the recording studio? If yes, what value should be used, \$450,000 or \$780,000? How will the value affect the project?

3. Brock Florist Company buys a new delivery truck for \$29,000. It is classified as a light-duty truck.

a. Calculate the depreciation schedule using a five-year life, straight-line depreciation, and the half-year convention for the first and last years.

b. Calculate the depreciation schedule using a five year life and MACRS depreciation.

4. Brock Florist Company sold their delivery truck in problem (see Problem 12) after three years of service. If MACRS was used for the depreciation schedule, what is the after tax cash flow from the sale of the truck (continue to use 30% tax rate) if

a. the sales price was \$15,000? b. the sales price was \$10,000? c. the sales price was \$5,000?

5. Grady Precision Measurement Tools has forecasted the following sales and costs for a new GPS system: annual sales of 48,000 units at \$18 a unit, production costs at 37% of sales price, annual fixed costs for production at \$180,000, and depreciation expense (straight-line) of \$240,000 per year. The company tax rate is 35%. What is the annual operating cash flow of the new GPS system?

6. The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds (1957 replicas). The necessary foundry equipment will cost a total of \$4,000,000 and will be depreciated using a five-year MACRS life. Projected sales in annual units for the next five years are 300 per year. If sales price is \$27,000 per car, variable costs are \$18,000 per car, and fixed costs are \$1,200,000 annually, what is the annual operating cash flow if the tax rate is 30%? The equipment is sold for salvage for \$500,000 at the end of year five. What is the after tax cash flow of the salvage? Net working capital increases by \$600,000 at the beginning of the project (Year 0) and is reduced back to its original level in the final year. What is the incremental cash flow of the project? Using a discount rate of 12% for the project, determine whether the project be accepted or rejected with the NPV decision model? (Note: I encourage you to use Excel to answer this question.)

Please come up with the solving process and the formulas you used

If you are using excel to answer some of the questions, please attche the excel file