2|Randi Corp. is considering the replacement of some machinery that has zero book value and acurrent market value of $3,800. One possible alternative is to invest in new machinery that costs$31,000. The new equipment has a four-year service life and an estimated salvage value of $4,500,will produce annual cash operating savings of $10,400, and will require a $3,200 overhaul in year 3.The company uses straight-line depreciation.FV of $1 at8%PV of $1 at8%FV of an ordinary annuity at8%1.0002.0803.2464.506PV of an ordinary annuity at8%0.9261.7832.5773.3123.993Year11.0800.9262341.1661.2600.8570.7941.3601.4691.5870.7350.6810.6305.8677.3364.623Required:Prepare a net-present-value analysis of Randi's replacement decision, assuming a(n) 8% hurdle rateand no income taxes. Should the machinery be acquired? (Negative amounts should be indicatedby a minus sign. Round your final answers to the nearest dollar.)

· Time value of money states that the value of money decreases over time. · The present value of a future cash flow amount is less than the future $ value. · Present value is calculated using a discounting factor rate. · Net present Value (NPV) is the excess of present value of cash flows over the initial invested cash outflow. >Requirement asked Purchase of new machine ($31,000) Sale of Old machine $3,800 Cash operating savings $34,445 [$10400 x 3.312, the PVA of $1 at 8% for 4th period] Overhaul ($2,541) [$3200 x 0.794, the PV of $1 at 8% for 3rd period] Salvage Value $3,308 [$4500 x 0.735, the PV of $1 at 8% for 4th period] Total $8,012 If machinery should be acquired YES >The ‘total’, which is basically the NPV, is positive which suggest that rate of return being earned is more than 8%.

Business

Accounting

2| Randi Corp. is considering the replacement of some machinery that has zero book value and a current market value of $3,800. One possible alternative is to invest in new machinery that costs $31,000. The new equipment has a four-year service life and an estimated salvage value of $4,500, will produce annual cash operating savings of $10,400, and will require a $3,200 overhaul in year 3. The company uses straight-line depreciation. FV of $1 at 8% 1.080 1.166 1.260 1.360 1.469 FV of an ordinary annuity at 8% 1.000 2.080 3.246 4.506 5.867 7.336 PV of $1 at 8% 0.926 0.857 PV of an ordinary annuity at 8% 0.926 Year 1.783 0.794 2.577 0.735 0.681 0.630 3.312 3.993 4.623 6 1.587 Required: Prepare a net-present-value analysis of Randi's replacement decision, assuming a(n) 8% hurdle rate and no income taxes. Should the machinery be acquired? (Negative amounts should be indicated by a minus sign. Round your final answers to the nearest dollar.) 123456

2| Randi Corp. is considering the replacement of some machinery that has zero book value and a current market value of $3,800. One possible alternative is to invest in new machinery that costs $31,000. The new equipment has a four-year service life and an estimated salvage value of $4,500, will produce annual cash operating savings of $10,400, and will require a $3,200 overhaul in year 3. The company uses straight-line depreciation. FV of $1 at 8% 1.080 1.166 1.260 1.360 1.469 FV of an ordinary annuity at 8% 1.000 2.080 3.246 4.506 5.867 7.336 PV of $1 at 8% 0.926 0.857 PV of an ordinary annuity at 8% 0.926 Year 1.783 0.794 2.577 0.735 0.681 0.630 3.312 3.993 4.623 6 1.587 Required: Prepare a net-present-value analysis of Randi's replacement decision, assuming a(n) 8% hurdle rate and no income taxes. Should the machinery be acquired? (Negative amounts should be indicated by a minus sign. Round your final answers to the nearest dollar.) 123456

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Blossom Company has a factory machine with a book value of $85,000 and a remaining useful life of 5 years. It can be sold for $25,000. A new machine is available at a cost of $345,000. This machine will have a 5-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $550,000 to $450,000. Prepare an analysis showing whether the old machine should be retained or replaced. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Retain Equipment Variable manufacturing costs $ Replace Equipment $ Net Income Increase (Decrease) New machine cost Sell old machine Total $ The old factory machine should be tA $ $
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Rockyford Company must replace some machinery that has zero book value and a current market value of $1,800. One possibility is to invest in new machinery costing $40,000. This new machinery would produce estimated annual pretax cash operating savings of $12,500. Assume the new machine will have a useful life of 4 years and depreciation of $10,000 each year for book and tax purposes. It will have no salvage value at the end of 4 years. The investment in this new machinery would require an additional $3,000 investment of net working capital. (Assume that when the old machine was purchased, the incremental net working capital required at the time was $0.) If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment are expected to occur over a four-year period. Rockyford is subject to a 40% income tax rate for all ordinary income and capital gains and has a 10%…
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