FIN201 - CORPORATE FINANCE

72-HOUR ASSIGNMENT #2

Note:

- This assignment covers session 4 - Making Capital Investment Decisions (Chapter 6).
- Cover Sheet and Peer Review Form must be attached.
- Answers to the questions are typed in Microsoft Word, which is then converted into PDF
for submissions.

Question 1

The Factory is considering a three-year project to improve its production efficiency. Buying
a new machine for $400,000 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 pretax salvage value at the end
of the project of $70,000. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years
1 to 6, respectively. Ignore bonus depreciation. The press also requires an initial investment
in inventory of $20,000, along with an additional $5,000 in inventory for each succeeding
year of the project. The inventory will return to its original level when the project ends. The
tax rate is 20 percent and its discount rate is 15 percent. Should the firm buy and install the
machine? Why or why not?
Question 2
You are working on a bid to build a bridge per year for the next three years. This project
requires the purchase of $1,000,000 of equipment that will be depreciated using straight-
line depreciation to a zero-book value over the project's life. Ignore bonus depreciation. The
equipment can be sold at the end of the project for $400,000. You will also need $250,000 in
net working capital over the life of the project. The fixed costs will be $500,000 per year and
the variable costs will be $3,000,000 per bridge. Your required rate of return is 20 percent
for this project and your tax rate is 10 percent. What is the minimal amount, rounded to the
nearest $100, you should bid per bridge?
Note: 3 years annuity factors of 20% required return = 2.106

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