A machine purchased 3 years ago for $140,000 is now too slow to satisfy the demand of the customers. It can be upgraded now for $81,000 or sold to a smallercompany internationally for $43,000. The upgraded machine will have an annual operating cost of $79,000 per year and a $29,000 salvage value in 3 years. Ifupgraded, the presently owned machine will be retained for only 3 more years, then replaced with a machine to be used in the manufacture of several otherproduct lines. The replacement machine, which will serve the company now and for a maximum of 8 years, costs $225,000. Its salvage value will be $53,000 foryears 1 through 5; $20,000 after 6 years; and $10,000 thereafter. It will have an estimated operating cost of $45,000 per year. Perform an economic analysis at10% per year using a specified 3-year planning horizon.a) Determine if the current machine should be replaced now or 3 years from now.b) Once decided, determine the equivalent AW for the next three years.

Current Machine (3 years old): - Initial cost: $140,000 (not relevant for future costs) -…

Answered: A machine purchased 3 years ago for…

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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6. The Imperial Chemical Company is considering purchasing a chemical analysis machine worth $13,000. Although the purchase of this machine will not produce any increase in sales revenues, it will result in a reduction of labour costs. In order to operate the machine properly, it must be calibrated each year. The machine has an expected life of 6 years, after which it will have no salvage value. The following table summarizes the annual savings in labour cost and the annual maintenance costs in calibration over 6 years: Net Cash Flow ($) Costs ($) Year (n) 0 Savings ($) 13,000 -13,000 1 2,300 6,000 3,700 2 2,300 7,000 4,700 3 2,300 9,000 6,700 4 2,300 9,000 6,700 5 2,300 9,000 6,700 6 2,300 9,000 6,700 Find the internal rate of return for this project. [6]
A high-speed electronic assembly machine was purchased two years ago for $50,000.
Clear Water Company has a down-hole well auger that was purchased 3 years ago for $30,000. O&M costs are $13,000 per year. Alternative A is to keep the existing auger, which has a current market value of $9,000. It will have a $0 salvage value after 7 more years. Alternative B is to buy a new auger that will cost $61,000 and will have a $12,000 salvage value after 7 years. O&M costs are $8,000 for the new auger. Clear Water can trade in the existing auger on the new one for $15,000. Alternative C is to trade in the existing auger on a "treated auger" that requires vastly less O&M cost at only $3,500 per year. It costs $71,000, and the trade-in allowance for the existing auger is $17,000. The "treated auger" will have an $18,000 salvage value after 7 years. Alternative D is to sell the existing auger on the open market and to contract with a current competitor to use their equipment and services to perform the drilling that would normally be done with the existing auger. The competitor…
Ned Tech Corporation is considering replacing one of its machines with a more efficient one. The old machine has a book value of $60,000 and a remaining useful life of 5 years. It can sell the old machine now for $ 265,000. The old machine is being depreciated by 120,000 per year straight line. The new machine has a purchase price of $ 1,175,000, an estimated useful life, five years of MACRS class life, and a salvage value of $145,000. Annual economic savings is $255,000 if the new machine is installed. Taxes are 21%, and WACC is 12. The depreciation Table for MACS is on page 176, Table 3. a. Calculate the NPV and IRR of the project and decide whether to accept or reject the project and why? b. What is the importance of cash flow to a company.
Solve both problem with details explanation , otherwise I will give you downvote
2. Super Apparel wants to replace an old machine with a new one. The new machine would increase annual revenue by $200,000 and annual operating expenses by $80,000. The new machine would cost $400,000. The estimated useful life of the machine is 10 years with zero salvage value. i. Compute Accounting Rate of Return (ARR) of the machine using above information. ii. Should Super Apparel purchase the machine if management wants an Accounting Rate of Return of 19% on all capital investments? Hint: Use Average Income or Profit after deducting tax, depreciation, and operating expenses.
Two different mutually exclusive alternatives can be used for producing a certain machine part. Alternative A will have a first cost of $60,000 with a $15,000 salvage value after its 3 year life. The operating cost with this method will be $35,000 per year. Alternative B will cost $45,000, but it will last only 2 years. Its salvage value is $10,000 with an operating cost of $25,000 per year. Using an MARR value of 12% per year, which method should be selected?
Choose the correct answer for the following question: Your company is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 10 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $300,000, annual operating costs of $42,000, and a 5-year life. Machine B costs $265,000, has annual operating costs of $50,000, and a 4-year life. The company currently pays no taxes. Which machine should be purchased and why? (Hint: consider the equivalent annual cost-EAC of the two machines) A. Machine A; because it will save the company about $8,783 a year B. Machine A; because it will save the company about $14,670 a year C. Machine B; because it will save the company about $11,482 a year D. Machine B; because it will save the company about $9,916 a year E. Machine A; because it will save the company about…
You have been asked to evaluate the proposed acquisition of a new Machine for your company. The machine’s basic price is $100,000. Assume that the machine can be depreciated using straight line over three years. The Machine would require an increase in net working capital (spare parts inventory) of $4,000 at the start of the project. This working capital will be recovered at Year 3. The machine would have no effect on revenues, but it is expected to save the firm $40,000 per year in before tax operating costs. This machine will help the firm reduce its labor costs. Assume that the firm’s marginal tax rate is 35%. a) If the cost of capital (WACC) is 10% , should the machine be purchased? Show all your work in the attached excel file. b) What is the minimum cost savings required to justify the purchase of this machine? Click here to get the Excel Template for this problem. (I attached a picture) Please upload your completed excel file.
A land development company is considering the purchase of earth-moving equipment. The equipment will have a first cost of $190,000 and a salvage value of $70000 when the company sells it in 10 years. A service contract for maintenance on the equipment will cost $40000 per year. The operating cost is expected to be $260 per day. Alternatively, the company can rent the necessary equipment for $1100 per day and hire a driver at $180 per day. If the company's MARR is 10% per year, how many days per year must the company need the equipment in order to justify its purchase? Alternatively
Kendra Company is considering replacing an old machine. The old machine was purchased for $100,700 and has a book value of $40,700 and should last four more years with no salvage value. The company believes that it could currently sell the old machine for $20,700. The new machine cost $80,700 and will have a 4-year life and a $10,700 salvage value. Currently, it costs $20,700 annually to operate the old machine. The new machine is more efficient and should reduce operating cost by 50%. Based on quantitative analysis, should Kendra Company replace the old machine?
Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method. Complete the following table to compute the net present value (NPV) of the investment. (Hint: Remember that, in Year 10, Alliances also receives the salvage value of the machine.) Year Cash Flow PV Interest Factor at 14%…

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