An investor is considering the purchase of an existing suburban office building approximately five years old.The building, when constructed, was estimated to have an economic life of 50 years, and the building-to-valueratio was 80 percent. Based on current cost estimates, the structure would cost $5 million to reproduce today.The building is expected to continue to wear out evenly over the 50-year period of its economic life. Estimatesof other economic costs associated with the improvement are as follows:Repairable physical depreciationFunctional obsolescence (repairable)Functional obsolescence (nonrepairable)$ 354,000 to repair$ 236,000 to repair$ 29,500 per year rent lossThe land value has been established at $1 million by comparable sales in the area. The investor believes thatan appropriate opportunity cost for any deferred outlays or costs should be 12 percent per year.Required:What would be the estimated value for this property? (Do not round intermediate calculations. Round yourfinal answer to the nearest dollar amount.)Estimated value

Value of property refers to the price at which the property is to be sold by the seller to the buyer…

Answered: An investor is considering the purchase…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase of land at a cost of $150,000. A new building will cost $120,000 and will be depreciated on a straight-line basis over 10 years to a salvage value of $0. Actual land salvage at the end of 10 years is expected to be $200,000. The actual building salvage at the end of 10 years is expected to be $190,000. Equipment for the facility is expected to cost $260,000. Installation costs will be an additional $20,000 and shipping costs will be $13,000. This equipment will be depreciated as a 7-year MACRS asset. Actual estimated salvage at the end of 10 years is $0. The project will require net working capital of $75,000 initially (year 0), an additional $40,000 at the end of year 1, and an additional $40,000 at the end of year 2. The project is expected to generate increased EBIT (operating income) for the firm of $110,000 during year 1. Annual EBIT is expected to grow at a rate…
Commercial Hydronics is considering replacing one of its larger control devices. A new unit sells for $32,000 (delivered). An additional $4,000 will be needed to install the device. The new device has an estimated 18-year service life. The estimated salvage value at the end of 18 years will be $2,000. The new control device will be depreciated as a 7-year MACRS asset. The existing control device (original cost = $15,000) has been in use for 9 years, and it has been fully depreciated (that is, its book value equals zero). Its scrap value is estimated to be $2,500. The existing device could be used indefinitely, assuming the firm is willing to pay for its very high maintenance costs. The firm's marginal tax rate is 40 percent. The new control device requires lower maintenance costs and frees up personnel who normally would have to monitor the system. Estimated annual cash savings from the new device will be $5,000. The firm's cost of capital is 10 percent. What is the NPV?
The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight-line basis over its 10-year economic life to an estimated salvage value of $10,000. If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent. a. $15,000 b. $27,000 c. $21,000 d. $18,000
A proposed cost-saving device has an installed cost of $825,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $91,000, the tax rate is 23 percent, and the project discount rate is 9 percent. The device has an estimated Year 5 salvage value of $139,000. What level of pretax cost savings do we require for this project to be profitable? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Pretax cost savings
Nguyen Inc. is considering the purchase of a new computer system (ICX) for $140,000. The system will require an additional $20,000 for installation. If the new computer is purchased it will replace an old system that has been fully depreciated. The new system will be depreciated over a period of 8 years using straight-line depreciation. If the ICX is purchased, the old system will be sold for $20,000. The ICX system, which has a useful life of 8 years, is expected to increase revenues by $31,000 per year over its useful life. Operating costs are expected to decrease by $3,000 per year over the life of the system. The firm is taxed at a 40 percent marginal rate. Round your answers to the nearest dollar. A. what investment is required to acquire the ICX system and replace the old system? B. compute the annual net cash flows associated with the purchase of the ICX system.
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $66,000. The machine would replace an old piece of equipment that costs $17,000 per year to operate. The new machine would cost $8,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $29,000. 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 amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.)
Ralph’s Bow Works (RBW) is planning to add a new line of bow ties that will require the acquisition of a new knitting and tying machine. The machine will cost $1.3 million. It is classified as a 7-year MACRS asset and will be depreciated as such. Interest costs associated with financing the equipment purchase are estimated to be $50,000 per year. The expected salvage value of the machine at the end of 10 years is $80,000. The decision to add the new line of bow ties will require additional net working capital of $55,000 immediately, $30,000 at the end of year 1, and $10,000 at the end of year 2. RBW expects to sell $370,000 worth of the bow ties during each of the 10 years of product life. RBW expects the sales of its other ties to decline by $23,000 (in year 1) as a result of adding this new line of ties. The lost sales level will remain constant at $23,000 over the 10-year life of the proposed project. The cost of producing and selling the ties is estimated to be $70,000 per year.…
Apricot Computers is considering replacing its material handling system and either purchasing or leasing a new system. The old system has an annual operating and maintenance cost of $35,000, a remaining life of 8 years, and an estimated salvage value of $5,100 at that time. A new system can be purchased for $286,000; it will be worth $26,000 in 8 years; and it will have annual operating and maintenance costs of $18,000/year . If the new system is purchased, the old system can be traded in for $18,000. Leasing a new system will cost $27,000/year , payable at the beginning of the year, plus operating costs of $9,100/year , payable at the end of the year. If the new system is leased, the old system will be sold for $10,000. MARR is 14%. Compare the annual worths of keeping the old system, buying a new system, and leasing a new system based upon a planning horizon of 8 years. What is the EUAC of the best option using the cash flow approach?
Assume that United Technologies is evaluating a proposal to change the company's manual design system to a computer-aided design (CAD) system. The proposed system is expected to save 10,000 design hours per year; an operating cost savings of $50 per hour. The annual cash expenditures of operating the CAD system are estimated to be $250,000. The CAD system requires an initial investment of $500,000. The estimated life of this system is five years with no salvage value. The tax rate is 40 percent. United Technologies has a cost of capital of 20 percent.Assume that management intends to use double-declining balance depreciation with a switch to straight-line depreciation (applied to any undepreciated balance) starting in Year 4.Determine the project's net present value
America Inc., is considering the addition of a new maintenance services division. Opening the division will require a new building, staff, and equipment. The proposed plan involves purchasing land that is currently selling for $750,000. The price of constructing the building on this land is $4.5 million and should be finished before operations begin in year 1. The building will be depreciated straight-line to a book value of $500,000 over 20 years. New equipment will cost $200,000 upfront, and will be depreciated straight line to zero over 4 years. An HR team will need to be brought on for hiring new staff. They estimate that the upfront cost of hiring will be $210,000. In addition, a sales forecast has already been formed for the project and the incurred fee for this service is $90,000. The team forecasts sales of $900,000, $800,000, $600,000, and $300,000 for years 1 through 4 respectively. In each year, inventory equal to one tenth of the current year’s revenue will be required.…
Table 9.7 Modified ACRS depreciation allowances Property Class Year 1 NT 2 3 4567 5 6 8 3-Year 33.33% 44.45 14.81 7.41 5-Year 20.00% 32.00 19.20 11.52 11.52 5.76 7-Year 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46
The Baltic Company is considering the purchase of a new machine tool to replace an obsolete one. The machine being used for the operation has a current book value of $80,000, with an annual depreciation expense of $8,000. It has a resale value today of $40,000, is in good working order, and will last, physically, for at least 10 more years. The proposed machine will perform the operation so much more efficiently that Baltic engineers estimate that labor, material, and other direct costs of the operation will be reduced $60,000 a year if it is installed. The proposed machine costs $240,000 delivered and installed, and its economic life is estimated at 10 years, with zero salvage value. The company expects to earn 14 percent on its investment after taxes (14 percent is the firm's cost of capital). The tax rate is 22 percent, and the firm uses straight-line depreciation. Any gain or loss on the sale of the machine at retirement is subject to tax at 40 percent. Would it be better…

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