A company with $500,000 in operating assets is considering the purchase of a machine that costs $60,000 and which is expected to reduce operating costs by $15,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to (Ignore income taxes

A company with $500,000 in operating assets is considering the purchase of a machine that costs $60,000 and which is expected to reduce operating costs by $15,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to (Ignore income taxes

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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A company is considering the purchase of a new machine for $58,000. Management predicts that the machine can produce sales of $17,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $7,000 per year including depreciation of $5,000 per year. The company's tax rate is 40%. What is the payback period for the new machine? a. 3.41 years. b. 6.44 years. c. 5.27 years. d. 11.60 years. e. 32.22 years. Carmel Corporation is considering the purchase of a machine costing $54,000 with a 7-year useful life and no salvage value. Carmel uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Carmel's average investment? a. $27,000. b. $30,857. c. $54,000. d. $8,816. e. $7,714.
Assume that a company is considering purchasing a machine for $100,000 that will have a seven-year useful life and a $16,500 salvage value. The machine will lower operating costs by $18,000 per year and increase sales volume by 1,000 units per year. The company earns a contribution margin of $3.00 per unit. The company also expects this investment to provide qualitative benefits that it is struggling to incorporate into its financial analysis. Assuming the company’s required rate of return is 17%, the minimum dollar value per year that must be provided by the machine’s qualitative benefits to justify the $100,000 investment is closest to: Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.
Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $48,000 and a remaining useful life of four years. It can be sold now for $58,000. Variable manufacturing costs are $48,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is four years. Purchase price Variable manufacturing costs per year (a) Compute the income increase or decrease from replacing the old machine with Machine A. (b) Compute the income increase or decrease from replacing the old machine with Machine B. (c) Should Lopez keep or replace its old machine? (d) If the machine should be replaced, which new machine should Lopez purchase? Req A Complete this question by entering your answers in the tabs below. Req B Req C and D Compute the income increase or decrease from replacing the old machine with Machine B. (Amounts to be deducted should be indicated with a minus…
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J.B. Enterprises is considering the purchase of new equipment with a cost of $1,000,000. If the equipment is purchased, the incremental net cash flows are expected to be $300,000 per year for five years. These net cash flows already reflect the of the equipment and the company’s 40% tax rate. However, there are liability risks associated with the use of this product. The board of directors estimates a “cost of worry” of $25,000 per year. Calculate the net present value of this project incorporating the cost of worry if the company’s cost of capital is 10%. a. $42,466 b. $340,909 c. $375,000 d. $61,420
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Beacon Company is considering automating its production facility. The initial investment in automation would be $6.46 million, and the equipment has a useful life of 5 years with a residual value of $1,060,000. The company will use straight-line depreciation. Beacon could expect a production increase of 43,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income. Per Unit $ 98 Net present value $18 25 11 54 $44 Current (no automation) 76,000 units Total $ ? ? $1,220,000 ? Proposed (automation) 119,000 units Per Unit $98 $18 ? 11 ? $49 Total $? ? $ 2,190,000 ? Check my we 5. Recalculate the NPV using a 10 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate…
Galactic is contemplating the purchase of a new $570,000 computer-based order entry system. The system will be depreciated using the MACRS 5-year depreciation schedule. It will be worth $70,000 at the end of the project in 6 years. You will save $40,000 before taxes per year in order processing costs, and you will be able to reduce net working capital by $30,000. You will also increase sales by $100,000 per year for the first year and this number will increase by 3% per year. If the tax rate is 30 percent, and the required rate of return is 10%, what is the NPV of this project?
Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $45,000 and a remaining useful life of five years. It can be sold now for $52,000. Variable manufacturing costs are $36,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Purchase price Variable manufacturing costs per year (a) Compute the income increase or decrease from replacing the old machine with Machine A. (b) Compute the income increase or decrease from replacing the old machine with Machine B. (c) Should Lopez keep or replace its old machine? (d) If the machine should be replaced, which new machine should Lopez purchase? Req A Complete this question by entering your answers in the tabs below. Req B Revenues Machine A: Keep or Replace Analysis Req C and D Compute the income increase or decrease from replacing the old machine with Machine A. (Amounts to be…
Your firm is contemplating the purchase of a new $515,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $53,000 at the end of that time. You will save $153,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $78,000 (this is a one-time reduction). If the tax rate is 21 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR %
The engineering team at Manuel’s Manufacturing, Inc., is planning to purchase an enterprise resource planning (ERP) system. The software and installation from Vendor A costs $380,000 initially and is expected to increase revenue $125,000 per year every year. The software and installation from Vendor B costs $280,000 and is expected to increase revenue $95,000 per year. Manuel’s uses a 4-year planning horizon and a 10% per year MARR. Solve, a. What is the discounted payback period of each investment? b. Which ERP system should Manuel purchase if his decision rule is to select the system with the shortest DPBP?