7. Tony runs a protable business knighting rich and naive tourists into the Order of Gondwonaland.

Tony currently sells a knighthood for $3,000 and the newly knighted person receives a
commemorative sword that costs $1,180 to produce. Tony is considering revising his business model,
dropping the knighthood sales price to $2,500 and giving the knights a plastic sword that only costs
$530 to produce. He expects this will allow him to increase sales from 260 to 420 per year.

What is the incremental annual EBIT from this change?

8. Your company is purcharsing a $53 million machine. It will be useful for eleven years, which is also
the machines depreciable life. The machine will be depreciated using prime-cost depreciation and
has no salvage value. The machine will generate incremental revenues of $15 million per year with
incremental costs of $8 million per year. Your company pays taxes at a marginal rate of 30%. What is
the net present value of the machine at a discount rate of 4%?

(a) $2.13 million

(b) $2.51 million

(c) $2.99 million

(d) $2.23 million

(e) $2.59 million

9. Your rm is considering replacing its production machinery. The current machine cost $264.0
million when it was purchased six years ago and is being depreciated at prime-cost over a useful life
of fteen years. You are evaluating a new machine that will cost $667.2 million and have a useful life
of twenty-four years using prime-cost depreciation. If the new machine is purchased and the old
machine is sold, what is the resulting incremental depreciation during the rst full year of
production?

(a) $71.8 million

(b) $10.2 million

(c) $17.6 million

(d) $27.8 million

(e) $45.4 million

10.A rm experiences the following events during a scal year:

It sells 1,600 items at $93 each. Of this, 80% is sold for cash with the remainder sold on credit It
produces 1,860 items at a cost of $88 each. Suppliers were paid 60% in cash with the remainder on
credit. It received payments of $35,700 from customers that had purchased on credit in previous
years.
Given these were the only nancially relevent events during the scal year, what costs did the rm
report on its income statement and what was the change in accounts receivable on the balance
sheet?

11. Range Bruiser, a manufacturer of luxury four-wheel drive vehicles, is considering launching the
Range Bruiser Green. While the vehicle will be less fuel ecient than existing Range Bruiser vehicles,
it will feature a sultry voice that says Eco mode engaged when the car is turned o. You have the
following information about the project during its rst scal year:

Range Bruisers annual revenues are expected to be increase to $134 million from $42 million. The
total annual revenue gures above reect a $17 million side-eect as the Green will take sales away
from Range Bruisers agship all-terain vehicle, the Hyrdofracker. Range Bruiser will run a
promotion extending credit equivalent to 17% of the Greens sale price. Purchasers of the companys
existing vehicle lines will continue to have access to Range Bruisers standard 5% credit on vehicle
purchase price. All Range Bruiser loans do not charge interest and allow customers to make a single
payment of the full amount after two years. Annual expenses will increase to $71 million from $21
million. Much of the cost increase described above will be used to ght classactions suits over false
advertising claims. Fortunately, the companys legal defense team will allow the rm to maintain $19
million in accounts payable at the end of any scal year. Range Bruiser pays both marginal and total
income taxes at a rate of 25%.

What is the incremental annual cash ow from the Range Bruiser Green if all parties involved take
full advantage of nancial opportunities presented to them?