In order to increase production capacity, Global Industries is considering replacement an existingproduction machine with a new technologically improved machine effective January 1. The followinginformation is being considered by Global Industries:• The new machine would purchased for P160,000 in cash. Shipping, installation, and testingwould cost additional P30,000•The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 perunit. Incremental operating costs include P30 per unit in variable costs and total fixed costs ofP40,000 per year.•The investment in the new machine will require an immediate increase in working capital ofP35,000. This cash outflow will be recovered at the end of year 5•Global uses straight-line depreciation for financial reporting and tax reporting purposes. The newmachine has an estimated useful life of 5 years and zero salvage valueGlobal is subject to a 40% corporate income tax rateGlobal uses the net present value method to analyze investments and will employ the following+ factors and rates:Present Value of anPresent Value of P1 Ordinary Annuity of P1PeriodAt 10%At 10%10.9090.90920.8261.73630.7512.48740.6833.17050.6213.791Global Industries' net cash outflow in a capital budgeting decision isa. P190,000b. P195,000c. P204,525d. P225,000

Net cash outflow is the amount of initial investment in equipment and installation and investment in…

In order to increase production capacity, Global Industries is considering replacement an ex production machine with a new technologically improved machine effective January 1. The foll information is being considered by Global Industries: The new machine would purchased for P160,000 in cash. Shipping, installation, and to would cost additional P30,000 • The new machine is expected to increase annual sales by 20,000 units at a sales price of P unit. Incremental operating costs include P30 per unit in variable costs and total fixed co P40,000 per year. • The investment in the new machine will require an immediate increase in working cap P35,000. This cash outflow will be recovered at the end of year 5 • Global uses straight-line depreciation for financial reporting and tax reporting purposes. The machine has an estimated useful life of 5 years and zero salvage value Global is subject to a 40% corporate income tax rate • Global uses the net present value method to analyze investments and will employ the foll factors and rates: Present Value of an Present Value of P1 Ordinary Annuity of P1 Period At 10% At 10%

In order to increase production capacity, Global Industries is considering replacement an ex production machine with a new technologically improved machine effective January 1. The foll information is being considered by Global Industries: The new machine would purchased for P160,000 in cash. Shipping, installation, and to would cost additional P30,000 • The new machine is expected to increase annual sales by 20,000 units at a sales price of P unit. Incremental operating costs include P30 per unit in variable costs and total fixed co P40,000 per year. • The investment in the new machine will require an immediate increase in working cap P35,000. This cash outflow will be recovered at the end of year 5 • Global uses straight-line depreciation for financial reporting and tax reporting purposes. The machine has an estimated useful life of 5 years and zero salvage value Global is subject to a 40% corporate income tax rate • Global uses the net present value method to analyze investments and will employ the foll factors and rates: Present Value of an Present Value of P1 Ordinary Annuity of P1 Period At 10% At 10%

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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The Frank Ernst Co. wants to add an additional production line. To do this, the company must spend $100,000 to expand its current building and purchase $1.2 million in new equipment. The building expansion has a salvage value of $80,000 and the equipment has a salvage value of $390,000. This new line is expected to produce 200,000 units with a projected sales price of $4.65 per unit and a variable cost of $2.90 a unit. Gross profit from existing products is expected to decline by $29,000 a year as a result of this addition. Fixed costs are $42,000 annually. The net working capital requirement is $36,000. The company uses straight-line depreciation over the life of the product and requires a 15% rate of return. Taxes are incurred at a rate of 34%. The life of the project is five years. What is the total cash flow in year 5? $553,080 $582,080 $589,080 $618,740 None of the above.
ClockWatchers is about to introduce a new employee monitoring tool and has determined that it will charge $100 per unit. The company must decide whether or not to purchase a high-capacity manufacturing machine. If the high-capacity machine is selected, then the cash fixed costs will be $5,000 per year, with variable costs of $50 per unit and depreciation and amortisation expenses of $2,000. Otherwise the fixed costs will be $2,000, with variable costs of $75 per unit and depreciation and amortisation expenses of $500. If EBIT Break-even is how the company evaluates its projects, then above what level of expected sales should ClockWatchers choose the high fixed cost alternative? 60 units 90 units120 units 180 units
Consider the following project of Hand Clapper, Incorporated. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $14 million that will be depreciated straight- line to zero over the project's life. An initial investment in net working capital of $590,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $11.6 million in pretax revenues with $4.4 million in total pretax operating costs. The tax rate is 21 percent and the discount rate is 11 percent. The market value of the equipment over the life of the project is as follows: Year Market Value (millions) a. 1 $ 11.2 9.1 234 4.9 1.3 Assuming the company operates this project for four years, what is the NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) b-1. Compute…
Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two types of machines that would be appropriate are presently on the market. The company has determined the following: Machine A could be purchased for $22,000. It will last 10 years with annual maintenance costs of $800 per year. After 10 years the machine can be sold for $2,310. Machine B could be purchased for $20,000. It also will last 10 years and will require maintenance costs of $3,200 in year three, $4,000 in year six, and $4,800 in year eight. After 10 years, the machine will have no salvage value. Required: Assume an interest rate of 8% properly reflects the time value of money in this situation and that maintenance costs are paid at the end of each year. Ignore income tax considerations. Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase? Note: Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round…
Aria Acoustics, Incorporated (AAI), projects unit sales for a new 7-octave voice emulation implant as follows: Year Unit Sales 1 2 74,700 80,100 2345 5 85,800 83,000 69,900 Production of the implants will require $1,490,000 in net working capital to start and additional net working capital investments each year equal to 20 percent of the projected sales increase for the following year. Total fixed costs are $3,850,000 per year, variable production costs are $144 per unit, and the units are priced at $326 each. The equipment needed to begin production has an installed cost of $18,600,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 25 percent of its acquisition cost. The tax rate is 24 percent and the required return is 18 percent. (MACRS schedule) a. What is the NPV of the project? (Do not round intermediate calculations and…
Aria Acoustics, Incorporated (AAI), projects unit sales for a new 7-octave voice emulation implant as follows: Year Unit Sales 1 2345 2 3 5 72,300 77,700 82,600 80,600 66,700 Production of the implants will require $1,410,000 in net working capital to start and additional net working capital investments each year equal to 10 percent of the projected sales increase for the following year. Total fixed costs are $3,450,000 per year, variable production costs are $136 per unit, and the units are priced at $318 each. The equipment needed to begin production has an installed cost of $17,800,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 15 percent of its acquisition cost. The tax rate is 21 percent and the required return is 15 percent. (MACRS schedule) a. What is the NPV of the project? (Do not round intermediate calculations…
The ABC Corporation is considering introducing a new product, which will require buying new equipment for a monthly payment of $5,000. Each unit produced can be sold for $20.00. ABC incurs a variable cost of $10.00 per unit. Suppose that ABC would like to realize a monthly profit of $50,000. How many units must they sell each month to realize this profit?
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Nikul
The engineering team at Manuel’s Manufacturing, Inc., is planning to purchase an enterprise resource planning (ERP) system. The software and installation from Vendor A costs $380,000 initially and is expected to increase revenue $125,000 per year every year. The software andinstallation from Vendor B costs $280,000 and is expected to increase revenue $95,000 per year. Manuel’s uses a 4-year planning horizon and a 10%/year MARR. Solve, a. What is the future worth of each investment?b. What is the decision rule for determining the preferred investment basedon future worth ranking? c. Which (if either) ERP system should Manuel purchase?
Aria Acoustics, Incorporated (AAI), projects unit sales for a new 7-octave voice emulation implant as follows: Year Unit Sales 1 74,400 2345 79,800 85,400 82,700 69,500 Production of the implants will require $1,480,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $3,800,000 per year, variable production costs are $143 per unit, and the units are priced at $325 each. The equipment needed to begin production has an installed cost of $18,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as 7-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The tax rate is 23 percent and the required return is 17 percent. (MACRS schedule) a. What is the NPV of the project? (Do not round intermediate calculations and…
Oahu Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 5,100 units at $276 per unit. The equipment has a cost of $521,700, residual value of $39,300, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Line Item Description Amount Cost per unit: Direct labor $47.00 Direct materials 182.00 Factory overhead (including depreciation) 31.60 Total cost per unit $260.60 Determine the average rate of return on the equipment. If required, round to the nearest whole percent.

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