DYC Co is a medium sized manufacturing company that plans to increase capacity by purchasing new machinery at an initial cost of $3 million. The new machine will also require a further investment in working capital of $400,000. The investment is expected to increase annual sales by 5,500 units. Investment in replacement machinery would be needed after five years. Financial data on the additional units to be sold is as follows: $ 500 200 Selling price per unit Production costs per unit Variable administration and distribution expenses are expected to increase by $220,000 per year as a result of the increase in capacity. Fixed Costs are expected to $250 000. The scrap value of the machinery after five years is expected to be negligible. Tax liabilities are paid in the year in which they arise and DYC Co pays tax at 30% of annual profits. The Finance Director of DYC Co has proposed that the $3.4 million investment should be financed by an issue of loan notes at a fixed rate of 8% per year. DYC Co uses an after tax discount rate of 12% to evaluate investment proposals. Straight line depreciation is to be used. Required: Calculate the Net Present value of the new machinery. I

DYC Co is a medium sized manufacturing company that plans to increase capacity by purchasing new machinery at an initial cost of $3 million. The new machine will also require a further investment in working capital of $400,000. The investment is expected to increase annual sales by 5,500 units. Investment in replacement machinery would be needed after five years. Financial data on the additional units to be sold is as follows: $ 500 200 Selling price per unit Production costs per unit Variable administration and distribution expenses are expected to increase by $220,000 per year as a result of the increase in capacity. Fixed Costs are expected to $250 000. The scrap value of the machinery after five years is expected to be negligible. Tax liabilities are paid in the year in which they arise and DYC Co pays tax at 30% of annual profits. The Finance Director of DYC Co has proposed that the $3.4 million investment should be financed by an issue of loan notes at a fixed rate of 8% per year. DYC Co uses an after tax discount rate of 12% to evaluate investment proposals. Straight line depreciation is to be used. Required: Calculate the Net Present value of the new machinery. I

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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Operating costs are an important criteria when selecting what machinery would be the best choice for a company. What is the EUAW of this investment that costs $53,700, has annual benefits of $8,162/year, annual costs of $1,540/year, and a disposal cost of $4,800 at the end of its useful life? It has a useful life of 14 years. Use a 15% MARR.
Shue Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $24,100, and the company expects to sell 1,580 per year. The company currently sells 1,930 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,600 units per year. The old board retails for $22,500. Variable costs are 53 percent of sales, depreciation on the equipment to produce the new board will be $1,395,000 per year, and fixed costs are $3,100,000 per year. If the tax rate is 23 percent, what is the annual OCF for the project? Note: Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. OCF
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