As the newly appointed Financial Executive of this company, you are required to evaluate and make recommendations on whether to proceed with the replacement. (Hint: Use the NPV and IRR criterion)
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Four years ago, the Westin Company purchased a semi-automated machine with an installed cost of $80,000. It has an estimated life of 8 years from the time of purchase and is being
A new, fully automated machine can be purchased for $100,000 and another $20,000 is required to have the machine installed and commissioned. It has a 4-year life and is expected to reduce operating expenses by $60,000 each year. Sales are not expected to change. The
proposed new machine after 4 years, is expected to have an estimated salvage value of $20,000. The straight-line depreciation method is also being used for the proposed new machine.
If the proposed new machine is accepted, it is expected that net operating working capital would increase by $10,000. This investment would be fully recovered at the end of the project’s life. The company's cost of capital is 15% and its tax rate is 40%.
As the newly appointed Financial Executive of this company, you are required to evaluate and make recommendations on whether to proceed with the replacement. (Hint: Use the
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- Dunedin Drilling Company recently acquired a new machine at a cost of 350,000. The machine has an estimated useful life of four years or 100,000 hours, and a salvage value of 30,000. This machine will be used 30,000 hours during Year 1, 20,000 hours in Year 2, 40,000 hours in Year 3, and 10,000 hours in Year 4. With DEPREC5 still on the screen, click the Chart sheet tab. This chart shows the accumulated depreciation under all three depreciation methods. Identify below the depreciation method that each represents. Series 1 _____________________ Series 2 _____________________ Series 3 _____________________ When the assignment is complete, close the file without saving it again. Worksheet. The problem thus far has assumed that assets are depreciated a full year in the year acquired. Normally, depreciation begins in the month acquired. For example, an asset acquired at the beginning of April is depreciated for only nine months in the year of acquisition. Modify the DEPREC2 worksheet to include the month of acquisition as an additional item of input. To demonstrate proper handling of this factor on the depreciation schedule, modify the formulas for the first two years. Some of the formulas may not actually need to be revised. Do not modify the formulas for Years 3 through 8 and ignore the numbers shown in those years. Some will be incorrect as will be some of the totals. Preview the printout to make sure that the worksheet will print neatly on one page, and then print the worksheet. Save the completed file as DEPRECT. Hint: Insert the month in row 6 of the Data Section specifying the month by a number (e.g., April is the fourth month of the year). Redo the formulas for Years 1 and 2. For the units of production method, assume no change in the estimated hours for both years. Chart. Using the DEPREC5 file, prepare a line chart or XY chart that plots annual depreciation expense under all three depreciation methods. No Chart Data Table is needed; use the range B29 to E36 on the worksheet as a basis for preparing the chart if you prepare an XY chart. Use C29 to E36 if you prepare a line chart. Enter your name somewhere on the chart. Save the file again as DEPREC5. Print the chart.Gimli Miners recently purchased the rights to a diamond mine. It is estimated that there are one million tons of ore within the mine. Gimli paid $23,100,000 for the rights and expects to harvest the ore over the next ten years. The following is the expected extraction for the next five years. Year 1: 50,000 tons Year 2: 90,000 tons Year 3: 100,000 tons Year 4: 110,000 tons Year 5: 130,000 tons Calculate the depletion expense for the next five years, and create the journal entry for year one.Montello Inc. purchases a delivery truck for $25,000. The truck has a salvage value of $6,000 and is expected to be driven for 125,000 miles. Montello uses the units-of-production depreciation method, and in year one the company expects the truck to be driven for 26,000 miles; in year two, 30,000 miles; and in year three, 40,000 miles. Consider how the purchase of the truck will impact Montellos depreciation expense each year and what the trucks book value will be each year after depreciation expense is recorded.
- After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend 900,000 for new mining equipment and pay 165,000 for its installation. The mined gold will net the firm an estimated 350,000 each year for the 5-year life of the vein. CTCs cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. a. What are the projects NPV and IRR? b. Should this project be undertaken if environmental impacts were not a consideration? c. How should environmental effects be considered when evaluating this or any other project? How might these concepts affect the decision in part b?The Erley Equipment Company purchased a machine 5 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of purchase, and an expected salvage value of $10,000 at the end of the 10 years. It is being depreciated by the straight-line method toward a salvage value of $10,000, or by $9,000 per year. Anew machine can be purchased for $150,000, including installation costs. During its 5- year life, it will reduce cash operating expenses by $50,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life so the applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. The old machine can be sold today for $65,000. The firm’s tax rate is 35 percent. The appropriate discount rate is 16 percent. d. What is the NPV of this project? e.…The Erley Equipment Company purchased a machine 5 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of purchase, and an expected salvage value of $10,000 at the end of the 10 years. It is being depreciated by the straight-line method toward a salvage value of $10,000, or by $9,000 per year. Anew machine can be purchased for $150,000, including installation costs. During its 5- year life, it will reduce cash operating expenses by $50,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life so the applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. The old machine can be sold today for $65,000. The firm’s tax rate is 35 percent. The appropriate discount rate is 16 percent. a. If the new machine is purchased, what is…
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- Atlantic Control Company purchased a machine 2 years ago at a cost of $70,000. The machine is being depreciated using simplified straight-line over its 7-year class life. The machine would have no salvage value at the end of year 7, but could be sold now for $40,000.A new replacement machine can be purchased for $80,000. The new machine would be depreciated over 5 years. Rapidly changing technology has necessitated this project. Delivery and installation charges will amount to $10,000 and net working capital investment of $5,000 will be required at installation. The new machine will not increase sales, but will reduce operating costs by $20,000 per year. The firm's tax rate is 21%. What is the initial outlay for the project?The Darlington Equipment Company purchased a machine 5 years ago, prior to the TCJA, at a cost of $95,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,500 per year. If the machine is not replaced, it can be sold for $10,000 at the end of its useful life. A new machine can be purchased for $180,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $40,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. The new machine is eligible for 100% bonus depreciation at the time of purchase. The old machine can be sold today for $50,000. The firm's tax rate is 25%. The appropriate WACC is 9%. a. If the new machine is purchased, what is the amount of the initial cash flow at Year 0 after bonus depreciation is considered? Cash outflow should be indicated by a minus sign. Round your answer to the…The Darlington Equipment Company purchased a machine 5 years ago, prior to the TCJA, at a cost of $95,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,500 per year. If the machine is not replaced, it can be sold for $10,000 at the end of its useful life. A new machine can be purchased for $170,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $55,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. The new machine is eligible for 100% bonus depreciation at the time of purchase. The old machine can be sold today for $60,000. The firm's tax rate is 25%. The appropriate WACC is 9%. a. If the new machine is purchased, what is the amount of the initial cash flow at Year 0 after bonus depreciation is considered? Cash outflow should be indicated by a minus sign. Round your answer to the…
