Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification systemfor $15 million. The system will last 5 years. Do-It-Right sells a sturdier but more expensive system for $20 million; it will last for 10years. Both systems entail $1 million in operating costs; both will be depreciated straight-line to a final value of zero over their usefullives; neither will have any salvage value at the end of its life. The firm's tax rate is 30%, and the discount rate is 13%.a. What is the equivalent annual cost of investing in the cheap system?Note: Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions roundedto 2 decimal places.b. What is the equivalent annual cost of investing in the more expensive system?Note: Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions roundedto 2 decimal places.c. Which system should Blooper install?a. Equivalent annual costb. Equivalent annual costc. Which system should Blooper install?millionsmillions

ParticularsQuick & Dirty system( Cheap System)Do it Right system (more expensive…

Answered: Blooper Industries must replace its…

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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High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $81,000 for five years, due at the beginning of each year. This machine will save Farmer $29,500 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $378,000. This machine will save $30,500 per year in electricity costs. A local bank has offered to finance the machine with a $378,000 loan. The interest rate on the loan will be 6 percent on the remaining balance and will require five annual principal payments of $75,600. Farmer has a target debt-to-asset ratio of 60 percent and a tax rate of 21 percent. After five years, both machines will be worthless. The machines will be depreciated on a straight-line basis. a. What is…
You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $80 initially, and then requires $125 per year in maintenance costs. Machine B costs $150 initially, has a life of three years, and requires $100 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. The discount rate is 12 percent and the tax rate is zero. Calculate the EAC. Which one should you choose?
DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $450,000 and a remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but DeYoung can sell it now to a Halloween mask manufacturer for $135,000. The old machine is being depreciated by $90,000 per year for each year of its remaining life. If DeYoung doesn't replace the old machine, it will have no salvage value at the end of its useful life. The new machine has a purchase price of $775,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total,…
DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The current machine has a book value of $600,000 and is being depreciated by $120,000 per year over its remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but DeYoung can sell it now to a Halloween mask manufacturer for $180,000. If DeYoung doesn't replace the current machine, it will have no salvage value at the end of its useful life. The new machine has a purchase price of $825,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, an annual savings of $185,000 will…
A commercial oven with a book value of $87,000 has an estimated remaining 5-year life. A proposal is offered to sell the oven for $8,500 and replace it with a new oven costing $110,000. The new machine has a 5-year life with no residual value. The new machine would reduce annual maintenance costs by $23,000. Provide a differential analysis, in good form, on the proposal to replace the commercial oven.
The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $550,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $250,000. The old machine is being depreciated by $110,000 per year, using the straight-line method. The new machine has a purchase price of $1,100,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $160,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $245,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC. a. What initial cash…
The Georgia Ceramic Company has anautomatic glaze sprayer that has been used for thepast 10 years. The sprayer can be used for another10 years and will have a zero salvage value at thattime. The annual operating and maintenance costsfor the sprayer amount to $15,000 per year. Due toan increase in business, a new sprayer must be purchased. Georgia Ceramic is faced with two options.• Option 1: If the old sprayer is retained, a newsmaller capacity sprayer will be purchased at a costof $48,000, and it will have a $5,000 salvage valuein 10 years. This new sprayer will have annualoperating and maintenance costs of $12,000. Theold sprayer has a current market value of $6,000.• Option 2: If the old sprayer is sold, a newsprayer of larger capacity will be purchased for$84,000. This sprayer will have a $9,000 salvagevalue in 10 years and will have annual operatingand maintenance costs of $24,000.Which option should be selected at MARR = 15%?
Vijay
(Ignore income taxes in this problem.) Sam Corporation is investigating automating a process by purchasing a new machine for $483,000 that would have a 7 year useful life and no salvage value. By automating the process that would increase sales revenues by $438,000 per year and cash operating expenses by $258.000 per year. The company's current equipment would be sold for scrap now, yielding $29,000. The annual depreciation on the new machine would be $69.000. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
Yoga Ltd is requesting a purchase of an upgraded class streaming system with an installed cost of $574,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the system can be sold tor $20,000. The old system will be sold off for $10,000. The system will generate new tuition of $116,000 per year with negligible changes to operating costs. In year three the software license will need to be renewed at a cost of 15,000. The system requires an initial investment in net working capital of $15,000. If required rate of return is 10 percent, what is the present value of net cash flow for Year 3 (rounded to a whole number)?
please asnwer correctly: Your company has been approached to bid on a contract to sell 5,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.4 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $395,000 to be returned at the end of the project, and the equipment can be sold for $325,000 at the end of production. Fixed costs are $595,000 per year, and variable costs are $85 per unit. In addition to the contract, you feel your company can sell 12,300, 14,600, 19,200, and 11,600 additional units to companies in other countries over the next four years, respectively, at a price of $180. This price is fixed. The tax rate is 23 percent, and the required return is 10 percent. Additionally, the president of the company…

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