Illustration: ABC Company is considering the replacement of the current machine with a new one. The old machine has a book value of $0 and a salvage value of $8,000. The new machine would cost $30,000 and will result in an annual savings of $10,000 per year because of improved operating efficiency. It has a useful life of six years and an expected salvage value of $6,000. Straight-line depreciation is used, and the company has a marginal tax rate of 40%. The desired minimum rate of return is 20%. (Note, when evaluating a project that would increase sales or reduce costs, the marginal tax rate should be used.)

Illustration: ABC Company is considering the replacement of the current machine with a new one. The old machine has a book value of $0 and a salvage value of $8,000. The new machine would cost $30,000 and will result in an annual savings of $10,000 per year because of improved operating efficiency. It has a useful life of six years and an expected salvage value of $6,000. Straight-line depreciation is used, and the company has a marginal tax rate of 40%. The desired minimum rate of return is 20%. (Note, when evaluating a project that would increase sales or reduce costs, the marginal tax rate should be used.)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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2. Super Apparel wants to replace an old machine with a new one. The new machine would increase annual revenue by $200,000 and annual operating expenses by $80,000. The new machine would cost $400,000. The estimated useful life of the machine is 10 years with zero salvage value. i. Compute Accounting Rate of Return (ARR) of the machine using above information. ii. Should Super Apparel purchase the machine if management wants an Accounting Rate of Return of 19% on all capital investments? Hint: Use Average Income or Profit after deducting tax, depreciation, and operating expenses.
A new high-efficiency digital-controlled flange-lipper can be purchased for $130,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency 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 33.33%, 44.45%, 14.81%, and 7.41%. The old machine can be sold today for $50,000. The firm's tax rate is 35%, and the appropriate cost of capital is 14%. If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar.$ What are the incremental net cash flows that will occur at the end of Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest whole dollar. CF1 $ CF2 $…
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Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $151,640, including freight and installation. Henrie's estimated the new machine would increase the company's cash inflows, net of expenses, by $40,000 per year. The machine would have a five-year useful life and no salvage value. Click here to view Exhibit 148-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using table. Required: 1. What is the machine's internal rate of return? Note: Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%. 2. Using a discount rate of 10%, what is the machine's net present value? Interpret your results. 3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $35,030 per year. Under these conditions, what is the internal rate of return? Note: Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as…
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Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $151,640, including freight and installation, Henrie's estimated the new machine would increase the company's cash inflows, net of expenses, by $40,000 per year. The machine would have a five-year useful life and no salvage value. Required: 1. What is the machine's internal rate of return? Note: Round your answer to the nearest whole percentage.