Apharmaceutical 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$33,000. It has five more years of straight-line depreciation available ( kept) of $6,600 per year, at which time its BV would be $0. The estimated MV of the equipment five years fromnow (in year-zero dollars) is $18,000. The MV rate of increase on this type of equipment has been averaging 4 2% per year. The total operating and maintenance and other relatedexpenses are averaging $26,500 (AS) per yearNew automated replacement equipment would be leased. Estimated operating and maintenance and related company expenses for the new equipment are $11,900 per year. Theannual leasing cost would be $24,100. The after-tax MARR (with an inflation component) is 10% per year (): -25%; and the analysis period is five years, Based on an after-tax, ASanalysis, should the replacement be made? 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)GTS

Working Note #1 Calculation of proceeds from present equipment: Market value of present equipment…

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

The Adderley Corporation is considering investing in a new machine that has an estimated life of three years. The cost of the machine (in 5 millions) is $500 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The machine will result in sales of 300 million widgets in year 1 with future sales estimated to grow by 10% per year. The price per widget that Adderley will charge its customers is $19 and is to remain constant over the three years. The widgets have a cost per unit to manufacture of $7 each. Installing the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the company will need to hold 3% of its annual revenues in cash, 4% of its annual revenues in accounts receivable, 13% of its annual revenues in inventory, but will also benefit from trade financing (ie, accounts payable) equal to 6% of its annual revenues. The firm is in the 28%…
Wary Corporation is considering the purchase of a machine that would cost $335,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $48,000. The machine would reduce labor and other costs by $101,000 per year. The company requires a minimum pretax return of 10% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. Required: Determine the net present value of the project. Note: Round your intermediate calculations and final answer to the nearest whole dollar amount. Net present value
Maxwell Manufacturing is contemplating the purchase of a new machine to replace a machine that has been in use for seven years. The old machine has a net book value (NBV) of $51,000 and still has five years of useful life remaining. The old machine has a current market value of $5,100, but is expected to have no market value after five years. The variable operating costs and depreciation expenses (straight-line basis) are $120,000 per year. The new machine will cost $86,000, has an estimated useful life of five years with zero disposal value after five years, and an annual operating expense of $101,000 (including straight-line depreciation). Considering the five years in total and ignoring the time value of money and income taxes, what is the difference in total relevant costs for the two decision alternatives (keep vs. replace)?
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?
Amoco Canada has oil field equipment placed into service 5 years ago for which a replacement study has been requested. Due to its special purpose, it has been decided that the current equipment will have to serve for either 2, 3, or 4 more years before replacement. The equipment has a current market value of $100,000, which is expected to decrease by $25,000 per year. The AOC is constant now, and is expected to remain so, at $25,000 per year. The replacement challenger is a fixed-price contract to provide the same services at $60,000 per year for a minimum of 2 years and a maximum of 5 years. Use MARR of 12% per year to perform a replacement study over a 6-year period to determine when to sell the current equipment and purchase the contract services.
We assume that the company that you selected is considering a new project. The project has 8 years’ life. This project requires an initial investment of $580 million to purchase equipment, and $30 million for shipping & installation fees. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 10% of the purchase price (including the shipping & installation fee). The number of units of the new product expected to be sold in the first year is 2,660,000 and the expected annual growth rate is 10.5%. The sales price is $280 per unit and the variable cost is $225 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 3.0%. The required net operating working capital (NOWC) is 11.8% of sales with the corporate tax rate of 21%. The project is assumed to have the same risk as the corporation, so 5.35% is the discount rate for this hypothetical project. Estimate annual cash flows for the 8…
Pear Orchards is evaluating a new project that will require equipment of $249,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $67,100. However, the company plans to keep the equipment for a different project in another state. The tax rate is 21 percent. What aftertax salvage value should the company use when evaluating the current project?.
1. Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.82 million. The marketing department predicts that sales related to the project will be $2.52 million per year for the next four years, after which the firm expects to sell it for $500,000. The machine is a five-year class asset and will be depreciated down to zero over five years under the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. Howell also needs to add net working capital of $200,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35 percent. The required rate of return (or discount rate) for the project is 12.5 percent. Compute the NPV, IRR, and payback period of the project. The firm’s acceptable payback period is 3 years. Is this project acceptable to the firm?
An airline is considering a project of replacement and upgrading of machinery that would improve efficiency. The new machinery costs $500 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 $300 each year for 5 consecutive years and project outflows will also begin in one year and are expected to be $150.00 each year for 5 consecutive years. The corporate tax rate is 30% and the required rate of retum is 7% Calculate the project's net present value. Place your answer in dollars and cents. Do not include a dollar sign or comma in your answer. Work your analysis with at least four decimal places of accuracy YOU ARE NOT FINISHED. NOW GO ON TO THE SECOND PARTI PART 2. Given your estimate of the NPV, should you accept or reject the project? Type the word "accept" if you believe you should go ahead with the project of the word "reject" if you…
We assume that the company that you selected is considering a new project. The project has 8 years' life. This project requires an initial investment of $580 million to purchase equipment, and $30 million for shipping & installation fees. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 10% of the purchase price (including the shipping & installation fee). The number of units of the new product expected to be sold in the first year is 2,660,000 and the expected annual growth rate is 10.5%. The sales price is $280 per unit and the variable cost is $225 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 3.0%. The required net operating working capital (NOWC) is 11.8% of sales with the corporate tax rate of 21%. The project is assumed to have the same risk as the corporation, so 5.35% is the discount rate for this hypothetical project. Estimate annual cash flows for the 8 years.…
A firm is considering purchasing a machine that costs $56000. It will be used for six years, and the salvage value at that time is expected to be zero. The machine will save $45000 per year in labor, but it will incur $9000 in operating and maintenance costs each year. The machine will be depreciated according to five-year MACRS. The firm's tax rate is 40%, and its after-tax MARR is 14%. Should the machine be purchased?
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?

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