A machine that cost $120,000 three years ago can be sold now for $54,000. Its market value is expected to be $40,000 and $20,000 one year and two years from now, respectively. Its operating cost was $18,000 for the first 3 years of its life, but the M&O cost is expected to be $23,000 for the next 2 years. A new improved machine that can be purchased for $138,000 will have an economic ife of 5 years, an operating cost of $9000 per year, and a salvage value of $32,000 whenever it is replaced. At an interest rate of 10% per year, determine if the presently owned machine should be replaced now, 1 year from now, or 2 years from now.

A machine that cost $120,000 three years ago can be sold now for $54,000. Its market value is expected to be $40,000 and $20,000 one year and two years from now, respectively. Its operating cost was $18,000 for the first 3 years of its life, but the M&O cost is expected to be $23,000 for the next 2 years. A new improved machine that can be purchased for $138,000 will have an economic ife of 5 years, an operating cost of $9000 per year, and a salvage value of $32,000 whenever it is replaced. At an interest rate of 10% per year, determine if the presently owned machine should be replaced now, 1 year from now, or 2 years from now.

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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The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $66,000. The machine would replace an old piece of equipment that costs $17,000 per year to operate. The new machine would cost $8,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $29,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.)
Apricot Computers is considering replacing its material handling system and either purchasing or leasing a new system. The old system has an annual operating and maintenance cost of $35,000, a remaining life of 8 years, and an estimated salvage value of $5,100 at that time. A new system can be purchased for $286,000; it will be worth $26,000 in 8 years; and it will have annual operating and maintenance costs of $18,000/year . If the new system is purchased, the old system can be traded in for $18,000. Leasing a new system will cost $27,000/year , payable at the beginning of the year, plus operating costs of $9,100/year , payable at the end of the year. If the new system is leased, the old system will be sold for $10,000. MARR is 14%. Compare the annual worths of keeping the old system, buying a new system, and leasing a new system based upon a planning horizon of 8 years. What is the EUAC of the best option using the cash flow approach?
Kramer's Carpet Cleaning which is located in Omaha, Nebraska, plans on acquiring a new carpet cleaning machine which costs $79,000. The new machine would replace an existing older machine that is currently in use. Annual operating costs for the old machine are $19,000. Projected annual operating costs for the new machine are $8,000. The old machine could be sold for $26,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What is the annual depreciation expense associated with the new carpet cleaning machine? 2. What is the annual incremental net operating income provided by the new carpet cleaning machine? 3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new carpet cleaning machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.) 1. Depreciation expense 2. Incremental net…
Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $40,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3. What is the initial investment used for calculating the machine's simple rate of return? 4. What is the simple rate of return on the new bottling machine? Note: Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3% 1. Depreciation expense 2. Incremental net operating income 3. Initial investment 4. Simple rate of return $ $ 12,000 80,000
Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $49,000 and a remaining useful life of five years. It can be sold now for $59,000. Variable manufacturing costs are $44,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Machine A Machine B Purchase price $ 122,000 $ 136,000 Variable manufacturing costs per year 18,000 15,000 (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?
An airline is considering a project of replacement and upgrading of machinery that would improve efficiency. The new machinery costs $300 today and is expected to last for 5 years with no salvage value. Straight line depreciation will be used. Project inflows connected with the new machinery will begin in one year and are expected to be $250 each year for 5 consecutive years and project outflows will also begin in one year and are expected to be $ 112.50 each year for 5 consecutive years. The corporate tax rate is 32% and the required rate of return is 9%. Calculate the project's net present value. YOU ARE NOT FINISHED. NOW GO ON TO THE SECOND PART! PART 2. Given your estimate of the NPV, should you accept or reject the project?
A health services firm is thinking about purchasing a large autoclave for $180,000. The autoclave is expected to generate $60,000 in its first year of operation. This amount will increase by 5% per year (so it would be $63,000 in year 2). Furthermore, the autoclave has a useful life of 8 years and an expected annual usage of 2,000 hours. Its salvage (market) value at the end ofyear 8 will be 10% of the initial investment. What is the equivalent annual worth of the autoclave, per hour of utilization, if the firm’s MARR is 8% per year?
Wooltech Industries is considering the purchase of two knitting machines. The Super X Knitter costs $25,000 and is expected to generate annual profits of $6.000 for five years. The Knitting Bee will cost $65.000 and will also generate annual profits of $10,000 but has an expected life of ten years. The salvage value of both machines at the end of their expected lifetimes is estimated at $6,000 each. If both machines meet Wooltech's needs, which machine should they purchase if their required annual compounded rate of return is 10%? What is the economic advantage, in current dollars, of the preferred machine? Multiple Choice Super X has $229.18 advantage Super X has $2,582.93 advantage Super X has $2.153.98 advantage Knitting Bee has $319.81 advantage Knitting Bee has $3286 advantage
A firm owns a pressure vessel that it is contemplating replacing. The old pressure vessel has annual operating and maintenance expenses of $60,000 per year and it can be kept for five more years, at which time it will have zero MV. It is believed that $30,000 could be obtained for the old pressure vessel if it were sold now. A new pressure vessel can be purchased for $120,000. The new pressure vessel will have an MV of $50,000 in five years and will have annual operating and maintenance expenses of $30,000 per year. Using a before-tax MARR of 20% per year, determine whether or not the old pressure vessel should be replaced. A study period of five years is appropriate.
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,960,000; the new one will cost, $2,531,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $660,000 after five years. The old computer is being depreciated at a rate of $472,000 per year. It will be completely written off in three years. If we don't replace it now, we will have to replace it in two years. We can sell it now for $684,000; in two years, it will probably be worth $204,000. The new machine will save us $413,000 per year in operating costs. The tax rate is 25 percent, and the discount rate is 8 percent. a-1. Calculate the EAC for the the old computer and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a - What is the NPV of the decision to replace the computer now? (A negative answer should be…
Emperor's Clothes Fashions can invest $5 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 6 million jars of makeup a year. Fixed costs are $3.8 million a year, and variable costs are $2.50 per jar. The product will be priced at $3.90 per jar. The plant will be depreciated straight-line over 5 years to a salvage value of zero. The opportunity cost of capital is 10%, and the tax rate is 30%. a. What is project NPV under these base-case assumptions? Note: Do not round intermediate calculations. Enter your answer in millions, rounded to 2 decimal places. b. What is NPV if variable costs turn out to be $2.80 per jar? Note: Do not round intermediate calculations. Enter your answer in millions, rounded to 2 decimal places. c. What is NPV if fixed costs turn out to be $3.3 million per year? Note: Do not round intermediate calculations. Enter your answer in millions, rounded to 2 decimal places. d. At what price per jar…
Miami Machine Shops, Ltd. is consideringpurchasing a vertical drill machine. The machinewill cost $62,000 and will have an eight-year servicelife. The selling price of the machine at the end ofeight years is expected to be $5,000 in today’s dollars. The machine will generate annual revenues of$22,000 (today’s dollars), but the company expectsto have an annual expense (excluding depreciation)of $9,500 (today’s dollars). The asset is classified asa seven-year MACRS property. The project requiresa working-capital investment of $10,000 at year 0.The marginal income tax rate for the firm is averaging 35%. The firm’s market interest rate is 18%.(a) Determine the internal rate of return of thisinvestment.(b) Assume that the firm expects a general inflationrate of 5%, but that it also expects an 8% annualincrease in revenue and working capital and a6% annual increase in expense caused by inflation. Compute the real (inflation-free) internalrate of return. Is this project acceptable?

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