FIN5FMA – FINANCIAL Question 1) Explain the following with examples a

FIN5FMA – FINANCIAL

Question 1) Explain the following with examples

a. Opportunity cost

b. Sunk Cost

c. Salvage Value

d. Nominal Vs real cash flow

Question 2) The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.

a. Compute the incremental net income of the investment for each year.

b. Compute the incremental cash flows of the investment each year.

c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?

Question 3) Pilot Plus Pens would like to decide whether it should replace its old machine today or after 5 years. The machine’s current salvage value is $2.2 million. Its current book value is $1.4 million. If not sold, the old machine will require maintenance costs of $845,000 at the end of the year for next five years. Depreciation on the old machine is $280,000 per year. At the end of 5 years, it will have a salvage value of $120,000 and a book value of $0. A replacement machine costs $4.3 million now and requires maintenance costs of $330,000 at the end of year during its economic life of 5 years. At the end of five years, the new machine will have a salvage value of 800,000. It will be fully depreciated by the straight-line method. After five years a replacement machine will cost $3,200,000. The corporate tax is 40 percent and the appropriate discount rate is 8 percent. The company is assumed to earn enough revenues to generate tax shields from depreciation. Should Pilot plus Pens replace the old machine now or at the end of 5 years?