A manufacturing company plans to buy a newpiece of equipment for $70,000 which is expectedto last 10 years and will have a salvage value of$10,000. The new equipment will require anoverhaul at the end of year 5 at a cost of $21,000. Ifpurchased, the new equipment will allow thecompany to generate new revenues of $12,000 atthe end of each year. The company uses aninterest rate of 8%. What is the Present Worth ofthe project?

The present value is the value of the sum received at time 0. It is the current value of the sum…

Answered: A manufacturing company plans to buy a…

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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An investment of $120,000 with a service life of 12 years is being considered. The expected revenues are provided in the cash flow diagram below. The company would like to perform an after-tax calculation to see if the investment is a good one. The company uses an after tax MARR of 8% and has a tax rate of 45%. The CCA depreciation rate for this type of investment is 20% and there would be a salvage value of $14,400 at the end of the 12 years. 0 i = 8% 35,000 Salvage = 14,400 25,000 Years 8 12 ▼ 120,000 What is the after tax annual worth of the investment? Do you recommend investing?
A corporation is considering purchasing a new plant asset. The asset will cost $30,000. The corporation requires a 10% return on similar investments. The corporation plans to use the asse for 4 years and then sell it for the salvage value. The estimated salvage value of the asset in 4 years is $5,000. The corporation estimates that if purchased the new asset will provide addition net cash flows of $9,000 each year for 4 years (assume the cash flows occur at the end of the year): Calculate the net present value (you must include the calculation in order to receive credit) Should the business purchase the asset?
A company is planning to acquire a machine costing K500,000. Effective life of the machine is 5 years. The company is considering two options. One is to acquire the machine through leasing and the other is by borrowing K500,000 from its bankers at 10% p.a. simple interest. The principal amount of the loan will be paid in 5 equal annual instalments. The machine will be sold at K50,000 at the end of 5th year. The following is further information: a) Principal, interest, lease rentals are payable on the last day of each year. b) The machine will be fully depreciated over its effective life. c) Tax rate is 30% and after tax cost of capital is 8%. REQUIRED: Compute the lease rentals payable which will make the firm indifferent to the loan.
A machine is valued at 100,000 TL by the seller. The buyer of the machine estimates the useful life of the machine to be 12 years. At the end of 12 years, it is expected that the machine will be sold for 90,000 TL. The machine will cause an annual cost of 6.000 TL during its 12-year useful life, but it will also provide an annual saving of 15.000 TL. Since the interest rate is expected to be 9%, how much should the buyer pay for the machine whose price is determined as 100,000 TL by the seller? (TL=Turkish money)
A laboratory might buy a new piece of equipment for $26,785. The equipment's useful life is 4 years, and its salvage value is $5000. The company will save $9000 per year for 4 years if it buys the equipment. Maintenance costs in year 1 will be zero, but will increase each year starting in year 2 by $500 per year (the first year is covered by a warranty). Determine the Equivalent Annual Worth if the company's cost of money is 10%.
A construction company can purchase a used backhoe for $90,000 and spend $450 per day in operating costs. The equipment will have a 5 -year life then sell it at salvage for $3,000. Alternatively, the company can lease the equipment for $800 per day. How many days per year must the company use the equipment in order to justify its purchase at an interest rate of 6% per year.
Considering an interest rate of 8%, that the cost of the equipment is $300,000 and you will replace the equipment after 7 years, what is the annual cost if the expected salvage value is $75,000?
Assume that a company purchased a new machine for $19,000 that has a salvage value of $3,000 at the end of its useful life of five years. The machine is expected to save the company $6,000 a year in cash operating costs for five years. The company’s discount rate is 15%. The profitability index of this investment opportunity is closest to:
A company is considering an investment in a machine. The machine will cost $250,000 and will have a seven year useful economic life. It has a salvage value of $50,000. The expected annual operating costs for the machine would be $30,000 (for each year of the seven years). Assume that the company's desired return on its investment (MARR) is 11%, find the annual equivalent cost (AEC)?
Stevie’s Sporting Goods is considering investing $33,000 in a new machine. The machine is expected to last five years and have a salvage value of $8,000. Annual after-tax net cash inflow from the machine is expected to be $7,000. Calculate the accounting rate of return (aka the unadjusted rate of return). (Enter your answer as a percentage rounded to one decimal place, but do NOT include the percentage sign. For example: 5 divided by 35 is 0.142857, which you would enter as “14.3”)
Pharoah Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $122,480 and will increase annual expenses by $65,000 including depreciation. The oil well will cost $468,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 0 decimal places, eg. 13%) Annual rate of return %
Briar Corporation is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net cash flow of $204,000. The equipment will have an initial cost of $1,204,000 and an 8-year useful life. The salvage value of the equipment is estimated to be $204,000. Briar's cost of capital is 8%. (Future Value of $1. Present Value of $1, Future Value Annuity of $1. Present Value Annuity of $1) Note: Use appropriate factor from the PV tables. Required: a. What is the accounting rate of return? b. What is the payback period? c. What is the net present value? d. What would the net present value be with a 14% cost of capital? e. Based on the NPV calculations, what would be the equipment's internal rate of return? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D What is the accounting rate of return? Required E Note: Do not round intermediate calculations. Round your final…

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