A Plastic manufacturer has under consideration the proposal of production of high quality plastic glasses. The necessary equipment to manufacture the glasses would cost Rs 1,080,000. The production equipment would last five years with salvage value of Rs 80,000. It is also estimated that an additional investment in working capital would be required at start of project amounted to Rs 500,000. The glasses can be sold at Rs 30/- each. Regardless of level of production, the manufacturer will incur cash cost of Rs 450,000 each year. The variable cost is estimated at Rs 18.0 per glass. The manufacturer estimates it will sell about 65000 glasses in first year and there will be increase of 5% per year for next four years. Fixed cost is also expected to increase 8% per year but no change in variable cost is expected. The straight line method for depreciation will be used; the ordinary tax rate is 45%. Should the proposed equipment be purchased? Assume cost of capital is 20%.

A Plastic manufacturer has under consideration the proposal of production of high quality plastic glasses. The necessary equipment to manufacture the glasses would cost Rs 1,080,000. The production equipment would last five years with salvage value of Rs 80,000. It is also estimated that an additional investment in working capital would be required at start of project amounted to Rs 500,000. The glasses can be sold at Rs 30/- each. Regardless of level of production, the manufacturer will incur cash cost of Rs 450,000 each year. The variable cost is estimated at Rs 18.0 per glass. The manufacturer estimates it will sell about 65000 glasses in first year and there will be increase of 5% per year for next four years. Fixed cost is also expected to increase 8% per year but no change in variable cost is expected. The straight line method for depreciation will be used; the ordinary tax rate is 45%. Should the proposed equipment be purchased? Assume cost of capital is 20%.

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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Rafieza restaurant is considering the installation of a new processing machine that will cost RM54,000. The cooker has an installation cost of RM1,200. Networking capital of RM 800 is required at the time of installation. The decision will warrant an operating cost of RM8,500. What is the amount of initial outlay for the project?
The firm is considering two machines: Machine A with initial investment of $10,000 and annual maintenance cost of $1.000. The life of the machine A is 4 years. Machine B with initial investment of $20,000 and annual maintenance cost of $800. The life of the machine B is 6 years. If the required rate of return is 10%, calculate the equivalent annual cost (EAC) of each machine and which machine company must choose? (A) The EAC of Machine A is $4,154.71 and Machine B is $5,392.15. The Company must choose Machine B. (B) The EAC of Machine A is $4,154.71 and Machine B is $5,392.15. The Company must choose Machine A. (C) The EAC of Machine A is $3,169.87 and Machine B is $3,484.21. The Company must choose Machine B. (D) The EAC of Machine A is $3,169.87 and Machine B is $3,484.21. The Company must choose Machine A. Answer A D.
You are considering a four-year project to improve production efficiency of your press. Buying a new machine press for Rs 530.000 is estimated to result in Rs 205,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of Rs 90,000. The press also requires an initial investment in spare parts inventory of Rs 20,000, along with an additional Rs 3,000 in inventory for each succeeding year of the project. If the tax rate is 35 percent and discount rate is 9 percent, should you buy and install the machine press?
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Erebor Sdn Bhd is considering a replacement of an existing machine. The new machine would cost RM315,000 and require an installation cost of RM35,000, modification cost of RM15,000, and shipping cost of RM15,000. Last year the training of machine operators had cost RM10,000. If the replacement takes place, the company would have to increase its inventories by RM30,000. The new machine has a useful life of 7 years and estimated to have a salvage value of RM30,000 at the end of its useful life. The purchase price of the existing machine was RM110,000 with a transportation cost of RM10,000. The existing machine has been in use for 5 years and could currently be sold for RM50,000. It has useful life of another 7 years with no salvage value. The company uses straight line method in depreciating its assets. Over its seven year life, the new machine should increase sales by RM120,000 per year. The new machine will increase the operating expenses by RM20,000 per year but decrease the cost of…
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Erebor Sdn Bhd is considering a replacement of an existing machine. The new machine would cost RM315,000 and require an installation cost of RM35,000, modification cost of RM15,000, and shipping cost of RM15,000. Last year the training of machine operators had cost RM10,000. If the replacement takes place, the company would have to increase its inventories by RM30,000. The new machine has a useful life of 7 years and estimated to have a salvage value of RM30,000 at the end of its useful life.
The firm is considering two machines: Machine A with initial investment of $10,000 and annual maintenance cost of $1,000. The life of the machine A is 4 years. Machine B with initial investment of $20,000 and annual maintenance cost of $800. The life of the machine B is 6 years. If the required rate of return is 10%, calculate the equivalent annual cost (EAC) of each machine and which machine company must choose?
Master Machine Berhad is considering a four-year project to improve its production efficiency. Buying a new machine press for RM385,000 is estimated to result in RM145,000 in annual pre-tax cost savings. The press is depreciated using straight-line method of 5 years, and it will have a salvage value at the end of the project of RM45,000. The press also requires an initial investment in spare parts inventory of RM20,000, along with an additional RM3,100 in inventory for each succeeding year of the project. If the company’s tax rate is 22 percent and its discount rate is 9 percent, should the company buy and install the machine press?
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