1. Capital Budgeting Problems
19. Calculating EAC You are evaluating two different sound mixers. The jazzmaster costs $75,000, has a three-year life, and has pretax operating costs of $10,000 per year. The Discomaster costs $100,000, has a five-year life, and has pretax operating costs of $8,000 per year. For either sound mixer, you use straight-line depreciation to zero over the project’s life and assume a salvage value of $18,000. If your tax rate is 35 percent and your discount rate is 13 percent, compute the EAC for both mixers. Which do you prefer? Why?

2. Capital Budgeting Problems
NPVjazzmaster=-75,000+2,250 PVIFA13%,2+13,950 PVIF13%,3 =-61,578
NPV= EACjazzmaster PVIFA13%,3
-61,578= EACjazzmaster
EACjazzmaster= -26,079.42

3. Capital Budgeting Problems
NPVdiscomaster=-100,000+1,800 PVIFA13%,4+13,500 PVIF13%,5 =-87,318.69
NPV= EACdiscomaster PVIFA13%,5
-87,318.69= EACdiscomaster
EACdiscomaster= -24,826.19
Decision: -24,826.19>-26, choose discomaster

4. Capital Budgeting Problems
24. Abandonment Value We are examining a new project. We expect
to sell 2,000 units per year at $35 net cash flow apiece for the next 10
years. In other words, the annual operating cash flow is projected to be
$35  2,000 = $70,000 per year. The relevant discount rate is 17 percent,
and the initial investment required is $345,000.
What is the base-case NPV?
After the first year, the project can be dismantled and sold for $300,000.
If expected sales are revised based on the first year’s performance, when
would it make sense to abandon the investment? In other words, at what
level of expected sales would it make sense to abandon the project?
Suppose you think it is likely that expected sales will be revised up to
2,800 if the first year is a success and revised downward to 1,200 if the
first year is not a success.
If success and failure are equally likely, what is the NPV of the project?
Consider the possibility of abandonment in answering.
What is the value of the option to expand or abandon?

5. Capital Budgeting Problems
a. NPV= -345, ,000 PVIFA17%,10 = -18,897.75
b. 300,000  S 35 PVIFA17%,9
300,000  S
1,925.9  S c.

6. Capital Budgeting Problems
98,000 PVIFA17%,10 =456,543.16
42,000 PVIFA17%,10 = 195,661.20
=292,307.69
, ,307.69= 374,425.43
NPV= 374, ,000=29,425.43
d. Option Value=29, (-18,897.75)= 48,323.18

7. Capital Budgeting Problems