Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheappurification system for $20 million. The system will last 5 years. Do-It-Right sells a sturdier but more expensive systemfor $21 million; it will last for 6 years. Both systems entail $1 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The firm's taxrate 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 inmillions rounded to 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 inmillions rounded to 2 decimal places.c. Which system should Blooper install?X Answer is complete but not entirely correct.$$a. Equivalent annual costb. Equivalent annual costc. Which system should Blooper install?4.454.04Do-It-Rightmillionsmillions

Equivalent annual cost refers to the cost on an annual basis for asset at the time it is owned,…

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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Aristotle Biotechnology is investing in new manufacturing equipment to produce a vaccine that will cost it $500,000 and it will be fully depreciated straight line over 5 years. The new equipment will have no value after 5 years. The new equipment will save Aristotle 160,000 per year in expenses, it has no impact on revenue. Aristotle can also sell the old vaccine producing equipment, which has been fully depreciated, for $200,000 now. Aristotle Biotechnology opportunity cost of capital is 12% and marginal tax rate is 21%. What is the net present value (NPV) of purchasing the new equipment? (Round your answer to 2 decimal places)
Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method.a. What is the net cash flow in year 0 (i.e., initial outlay)?b. What are the net cash flows after taxes in each of the next 10 years?c. What is the NPV of the investment?d. Should Alliance replace its existing drill press?
Your company has been approached to bid on a contract to sell 20,000 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 $4,800,000 and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $180,000 to be returned at the end of the project, and the equipment can be sold for $300,000 at the end of production. Fixed costs are $835,000 per year and variable costs are $41 per unit. In addition to the contract, you feel your company can sell 5,400, 13,000, 15,000, and 8,300 additional units to companies in other countries over the next four years, respectively, at a price of $140. This price is fixed. The tax rate is 21 percent, and the required return is 11 percent. Additionally, the president of the company will undertake the project only…
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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…
4. The internal rate of return The “Arctic Express” mutual fund company invests its monies in Russia. They claim that money invested with them will quadruple in value over the next 10 years. Suppose you decide to invest $200 per month for the next 10 years in this fund. If their claim is true, what effective annual rate of return (IRR) will you have earned in this fund?
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
Inc. uses fine-tuned equipment to produce electronic products. Each one of its machines costs $10,000,000 to purchase plus an additional $900,000 a year to operate. The machines have a 6-year (6) life after which they are worthless. What is the equivalent annual cost of one these machines if the required return is 11.4 percent?

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