Bramble Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $57,227. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,900. At the end of eight years, the company will sell the truck for an estimated $27,500. Traditionally, the company has used a general rule that it should not accept a proposal unless it has a payback period that is less than 50% of the asset's estimated useful life. Charles Moore, a new manager, has suggested that the company should not rely only on the payback approach but should also use the net present value method when evaluating new projects. The company's cost of capital is 8%.

Bramble Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $57,227. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,900. At the end of eight years, the company will sell the truck for an estimated $27,500. Traditionally, the company has used a general rule that it should not accept a proposal unless it has a payback period that is less than 50% of the asset's estimated useful life. Charles Moore, a new manager, has suggested that the company should not rely only on the payback approach but should also use the net present value method when evaluating new projects. The company's cost of capital is 8%.

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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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. Complete the following table to compute the net present value (NPV) of the investment. (Hint: Remember that, in Year 10, Alliances also receives the salvage value of the machine.) Year Cash Flow PV Interest Factor at 14%…
Linkin Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s current truck (not the least of which is that it runs). The new truck would cost $55,440. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,400. At the end of 8 years, the company will sell the truck for an estimated $28,200. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset’s estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company’s cost of capital is 8%.(a) Compute the cash payback period and the net present value of the proposed investment. Cash payback period 6.6 years Net present value $
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A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,729.00 to install, $5,020.00 to operate per year for 7 years at which time it will be sold for $6,912.00. The second, RayCool 8, costs $41,419.00 to install, $2,021.00 to operate per year for 5 years at which time it will be sold for $8,947.00. The firm’s cost of capital is 5.34%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes.
Beryl's Iced Tea currently rents a bottling machine for $51,000 per year, including all maintenance expenses. It is considering purchasing a machine instead, and is comparing two options: a. Purchase the machine it is currently renting for $150,000. This machine will require $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $260,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $35,000 will be spent upfront training the new operators of the machine. Suppose the appropriate discount rate is 7% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The corporate tax rate is 30%. Should Beryl's Iced Tea continue…
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Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $18,600 per year and will have variable costs of $1,700 per year. Fixed costs are $950. The system will cost $50,400 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 21 percent. Please provide a pro forma financial statement to Cash Flows from Operations for the life of the pressure cooker. PLEASE ANSWER THIS QUESTION IN EXCEL FORMULA, NOT ALGEBRAICALLY!
A utility company is considering adding a second feedwater heater to its existing system unit to increase the efficiency of the system and thereby reduce fuel costs. The 150-MW unit will cost $1,650,000 and has a service life of 25 years. The expected salvage value of the unit is considered negligible. With the second unit installed, the efficiency of the system will improve from 55% to 56%. The fuel cost to run the feedwater is estimated at $0.05 kWh. The system unit will have a load factor of 85%, meaning that the system will run 85% of the year. Determine the equivalent annual worth of adding the second unit with an interest rate of 12%. Oa) $1,603,098 b) $12,573,321 Oc) $1,813,473 d) None of these
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The Fleming Company, a food distributor, is considering replacing a filling line at its Oklahoma City warehouse. The existing line was purchased several years ago for $3,600,000. The line’s book value is $445,000, and Fleming's management feels it could be sold at this time for $350,000. A new, increased capacity line can be purchased for $2,575,000 and will require and increase in NWC of $55,000. Delivery and installation of the new line are expected to cost $50,000 and 215,000 respectively. Assuming Fleming’s marginal tax rate is 35%, calculate the net investment for the new line.

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