A company is considering purchasing factory equipment that costs $327340 and is estimated to have no salvage value at the end of its5.6-year useful life. If the equipment is purchased, annual revenues are expected to be $150900 and annual operating expensesexclusive of depreciation expense are expected to be $25000. The straight-line method of depreciation would be used. The cashpayback period on the equipment is5.95 years.2.6 years.5.6 years.2.17 years.

The cash payback period is calculated as the time it takes for the cumulative net cash flows to…

Answered: A company is considering purchasing…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Madison Manufacturing is considering a new machine that costs $350,000 and would reduce pre-tax manufacturing costs by $110,000 annually. Madison would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $33,000 at the end of its 5-year operating life. The applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. Working capital would increase by $35,000 initially, but it would be recovered at the end of the project’s 5-year life. Madison’s marginal tax rate is 25%, and a 10% cost of capital is appropriate for the project. Calculate the project’s NPV, IRR, MIRR, and payback. Assume management is unsure about the $110,000 cost savings—this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of these extremes? Suppose the CFO wants you to do a scenario analysis with different values for the cost savings, the machine’s salvage value, and the working capital (WC) requirement. She asks…
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XYZ Company has an opportunity to purchase and asset that will cost the company $60,000. The asset is expected to add $12,000 per year to the company’s net income. Assuming the asset has a 5-year useful life and a zero salvage value, the unadjusted rate of return will be?
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i.3
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