A small strip-mining coal company is trying to decide whether it should purchase or lease a new clamshell. If purchased, the "shelI" will cost $147,500 and is expected to have a $40,000 salvage value after 6 years. Alternatively, the company can lease a clamshell for only $10,000 per year, but the lease payment will have to be made at the beginning of each year. If the clamshell is purchased, it will be leased to other strip-mining companies whenever possible, an activity that is expected to yield revenues of $15,000 per year. If the company's MARR is 19% per year, should the clamshell be purchased or leased on the basis of a future worth analysis? Assume the annual M&O cost is the same for both options. The future worth when purchased is $ -147563 The future worth when leased is $ The clamshell should be leased

A small strip-mining coal company is trying to decide whether it should purchase or lease a new clamshell. If purchased, the "shelI" will cost $147,500 and is expected to have a $40,000 salvage value after 6 years. Alternatively, the company can lease a clamshell for only $10,000 per year, but the lease payment will have to be made at the beginning of each year. If the clamshell is purchased, it will be leased to other strip-mining companies whenever possible, an activity that is expected to yield revenues of $15,000 per year. If the company's MARR is 19% per year, should the clamshell be purchased or leased on the basis of a future worth analysis? Assume the annual M&O cost is the same for both options. The future worth when purchased is $ -147563 The future worth when leased is $ The clamshell should be leased

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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A firm owns a drilling equipment that it is contemplating replacing. It is believed that P1,500,000 could be obtained for the old equipment if it were sold now, but it can be productively used for four more years at which time its market value will be zero. The equipment has an operating and maintenance of P600,000 per year. The firm can purchase a new machine, with the same functionality as the current machine, for P5,500,000. In four years the market value of the new machine is estimated to be P2,275,000. Annual operating and maintenance costs will be P1,850,000 per year. Should the old drilling equipment be replaced using a before-tax MARR of 15% and a study period of four years?
You are evaluating the proposed acquisition of a new crane. Its basic price is $150,000 and will cost another $30,000 to modify it for use by your firm. It falls into the MACRS 3 depreciation class, with applicable rates or 33%, 45%, 15%, and 7% annually. Your company plans to sell it after 3 years for $70,000. If your firm acquires the equipment, it will also have to increase its net operating working capital (for spare parts) by $6,000 per year. The equipment is not expected to increase revenues directly, but is expected to save the company $30,000 per year in before tax costs. The firm's tax rate is 40%. (a) What is the company's net investment if it acquires the earth mover? (b) What are the operating cash flows for years 1, 2, and 3? (c) What is the terminal cash flow? (d) If the project's cost of capital is 10%, should the crane be purchased?
Pilot Plus Pens is deciding when to replace its old machine. The old machine's current salvage value is $3 million. Its current book value is $2 million. If not sold, the old machine will require maintenance costs of $500,000 at the end of the year for the next five years. Depreciation on the old machine is $400,000 per year. At the end of five years, the old machine will have a salvage value of $400,000 and a book value of $0. A replacement machine costs $4 million now and requires maintenance costs of $350,000 at the end of each year during itsfeconomic life of five years. At the end of the five years, the new machine will have a salvage value of $1,000,000. It will be fully depreciated by the straight-line method. In five years, a replacement machine will cost $5,000,000. Pilot will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 28 percent and the appropriate discount rate is 10 percent. The company is assumed to earn sufficient…
Lumberjack Power, operator of a nuclear power plant, is planning to replace its current equipment with some that is more environmentally friendly. The old equipment has annual operating expenses of $6750 and can be kept for 8 more years. The equipment will have a salvage value of $4000, if sold 8 years from now, and has a current market value of $24,000, if it is sold now. The new equipment has an initial cost of $62,000 and has estimated annual operating expenses of $6250 each year. The estimated market value of the new equipment is $19,000 after 8 years of operation. If the company's MARR is 16% per year, should the equipment be replaced? Use a study period of 8 years and the present worth method.
Fluid Dynamics Company owns a pump that it is contemplating replacing. The old pump has annual operating and maintenance costs of $8,000/year: it can be kept for 4 years more and will have a zero salvage value at that time. The old pump can be traded in on a new pump. The trade-in value is $4,000. The new pump will cost $18,000 and have a value of $9,000 in 4 years and will have annual operating and maintenance costs of$4,500/ year. Using a MARR of 10%, evaluate the investment alternative based upon the present worth method and a planning horizon of 4 years. Solve,a. Use the cash flow approach. b. Use the opportunity cost approach.
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
note: can you help me answer the question for s, t and u? Lee Wah Press (LWP) is considering a leasing arrangement to finance some special printing machines that it needs for production during the next three years. A planned change in the company’s production technology will make the new machine obsolete after 3 years. LWP will depreciate the new machine on a straight-line basis towards zero salvage value. The firm can borrow the installed cost of $480,000, at 10% interest per annum, calculated on an annual reducing balance, to buy the new machine or make three equal beginning-of-year lease payments of $210,000 should it decide to take up lease financing. Annual maintenance costs associated with ownership, payable at the end of year, are estimated at $25,000. Annual insurance premium associated with the purchase is estimated to be at $6,000, payment is on a cash-before-cover basis. Should LWP opt for lease financing, all other costs will be borne by the lessor. LWP tax rate is 40%.…
Joanette, Inc., is considering the purchase of a machine that would cost $420,000 and would last for 5 years, at the end of which, the machine would have a salvage value of $42,000. The machine would reduce labor and other costs by $102,000 per year. Additional working capital of $4,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company requires a minimum pretax return of 17% on all investment projects. (ignore income taxes.) Click here to view Exhibit 128-1 and Exhibit 128-2 to determine the appropriate discount factor(s) using the tables provided. Required: Determine the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.) Net present value
EKH, Inc. is considering the purchase of a machine that would cost $400,000 and would last for 6 years,at the end of which, the machine would have a salvage value of $47,000. The machine would reducelabor and other costs by $109,000 per year. Additional working capital of $4,000 would be neededimmediately, all of which would be recovered at the end of 6 years. The company requires a minimumpretax return of 17% on all investment projects.Required :Determine the net present value of the project
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,070,000, and it would cost another $21,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $696,000. The machine would require an increase in net working capital (inventory) of $15,000. The sprayer would not change revenues, but it is expected to save the firm $405,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%. a. What is the Year 0 net cash flow? b. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1 Year 2 Year 3 c. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest…
You own a coal mining company and are considering opening a new mine. The mine will cost $117.1 million to open. If this money is spent immediately, the mine will generate $21.5 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.9 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 8.1%, what does the NPV rule say? Use the graph below to determine the IRR(s) in the problem. NPV ($ millions) 31- 21- NPV of the Investment in the Coal Mine 5 10 15 20 Discount Rate (%) What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) A. Accept the opportunity because the IRR is greater than the cost of capital. O B. The IRR is r= 11.83%, so accept the opportunity. O C. Reject the opportunity because the IRR is lower than the 8.1%…
Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two types of machines that would be appropriate are presently on the market. The company has determined the following: Machine A could be purchased for $33,000. It will last 10 years with annual maintenance costs of $1,100 per year. After 10 years the machine can be sold for $3,465. Machine B could be purchased for $27,500. It also will last 10 years and will require maintenance costs of $4,400 in year three, $5,500 in year six, and $6,600 in year eight. After 10 years, the machine will have no salvage value. Required: Assume an interest rate of 8% properly reflects the time value of money in this situation and that maintenance costs are paid at the end of each year. Ignore income tax considerations. Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase?

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