A pharmaceutical company has some existing semiautomated production equipment that they are considering replacing. This equipment has a present MV of $55,000 and a BV of $29,000. It has fiveKmore years of straight-line depreciation available (if kept) of $5,800 per year, at which time its BV would be 50. The estimated MV of the equipment five years from now in year-zero dollars) is $10,500The MV rate of increase on this type of equipment has been averaging 3.7% per year. The total operating and maintenance and other related expenses are averaging $25,000 (AS) per year.New automated replacement equipment would be leased. Estimated operating and maintenance and related company expenses for the new equipment are $12,300 per year The annual leasing costwould be $24,300. The after-tax MARR (with an inflation component) is 12% per year ( 25%; and the analysis period is five years. Based on an after-tax, AS analysis, should the replacement bemade? Base your answer on the actual IRR of the incremental cash flowThe actual IRR of the incremental cash flow is % (Round to one decimal place.)

Data given: MARR=12% Tax rate=25% n=5 years Working Note #1 Description Amount ($) Market…

Answered: A pharmaceutical company has some…

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

See similar textbooks

Similar questions

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%…
The milk processing plant of Nestle Company plans to replace 5 trucks of distribution of its current fleet of trucks that it maintains for distributions nationwide. The initial cost is $ 4,600 per truck and the expected useful life and salvage value will be 5 years and $ 300, respectively. The combined costs of insurance, maintenance, fuel and lubrication are expected to total is $ 650 for the first year and increases by $ 50 per year; while the delivery service will report additional revenue of $ 1,200 annually to the company. If the required rate of return is 10% per annum, use the ANNUAL VALUE method to determine if the purchase should go through. Extend your answer in as for the result. CASH FLOW CHART (Insert flow chart)
B2B Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment costs $360,000 and has a 12-year life and no salvage value. B2B Company requires at least an 8% return on this investment. The expected annual income for each year from this equipment follows: (PV of $1. FV of $1. PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Equipment Selling, general, and administrative expenses Income (a) Compute the net present value of this investment. (b) Should the investment be accepted or rejected on the basis of net present value? Complete this question by entering your answers in the tabs below. Required A Required B Compute the net present value of this investment. Note: Round your present value factor to 4 decimals and other final answers to the nearest whole dollar. Years 1 through 12 Initial…
Cullumber Lumber, Inc; is considering purchasing a new wood saw that costs $65000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $4500 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Cullumber’s tax rate is 26 percent, and it’s opportunity cost of capital is 13.10 percent. What is the project’s NPV?
A new absorption chiller system costs $360,000 and will save $52,500 in each of the next 12 years. The asset is classified as a seven-year MACRS property for depreciation purpose. The expected salvage value is $20,000. The firm pays taxes at a combined rate of 40% and has an MARR of 12%. What is the net present worth of the system?(a) $46,725(b) $63,739(c) $62,112(d) $53,317
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.a. What is the net cash flow in year 0 (i.e., initial outlay)?b. What are the net cash flows after taxes in each of the next 10 years?c. What is the NPV of the investment?d. Should Alliance replace its existing drill press?
Builtrite is considering the purchase of a new five-year machine worth $90,000. It will cost another $10,000 to install the machine and Builtrite will need to keep an extra $9,000 in inventory on hand due to the machine's efficiency. The current machine being used is 5 years old and originally cost $60,000 and is being depreciated down to zero over a 10-year period. If the current machine were sold today, it could be sold for $45,000. In five years, the new machine is estimated to have a salvage value of $36,000. Two employees will need to be trained for the new machine at a cost of $4000. The new machine is expected to produce $80,000 in annual savings. Builtrite is in the 34% tax bracket. What is the terminal cash flow for the new machine? O $23.760 O $31,800 O $32,760
Stepwise
7) costs for the current machine. The current machine is based on older technology and has negligible market value. The purchase price of the new equipment is $500,000 and it is expected to last for 10 years. Its terminal salvage value is $50,000. Operating and maintenance (O&M) costs are estimated to be $20,000 for the first year. Thereafter, these O&M costs are expected to increase by $2,000 each year over the previous year's costs. MARR is 10% per year compounded annually. a) b) purchase this new equipment? Explain. EmKay, Inc. has decided to purchase new equipment because of the increasing maintenance Compute the present worth for this new equipment purchase. If the annual O&M costs for the current machine are $75,000, would you support the decision to
A new machine costing $150,000 is expected to save the McKaig Brick Company $11,000 per year for 5 years before depreciation and taxes. The machine will be depreciated on a straight-line basis for a 5-year period to an estimated salvage value of $0. The firm’s marginal tax rate is 40 percent. What are the annual net cash flows associated with the purchase of this machine? Round your answer to the nearest dollar. $ Compute the net investment (NINV) for this project. Round your answer to the nearest dollar. $
A conveyor system was purchased three years ago for $60,000 with an expected useful life of 10 years and no expected salvage value. Due to a change in product configuration, the conveyor system must be upgraded at a cost of $20,000. Maintenance on this system is approximately $4000 per year and the current system has a market value of $2000. Alternatively, the current system can be replaced with new equipment costing $65,000, with operating costs of $1,000 per year and an expected salvage of $10,000 after 7 years. Determine whether the company should keep or replace the defender now at an MARR of 15% per year. The current system is the Defender and the new system is the Challenger. What is the annual worth of the challenger?
The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent line. The equipment necessary would cost $1.83 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 10 percent of its initial cost. The company believes that it can sell 29,000 tents per year at a price of $75 and variable costs of $34 per tent. The fixed costs will be $505,000 per year. The project will require an initial investment in net working capital of $237,000 that will be recovered at the end of the project. The required rate of return is 11.8 percent and the tax rate is 21 percent. What is the NPV?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS