Ises piece the current equipment. The new equipment costs $75,000 and requires $5,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. The old piece of equipment was purchased 4 years ago for an installed cost of $50,000; it was being depreciated under MACRS using a 5-year recovery period. The old equipment can be sold today for $55,000 net of any removal or cleanup costs. As a result of the proposed replacement, the firm's investment in net working capital is expected to increase by $15,000. The firm pays taxes at a rate of 40%.

Ises piece the current equipment. The new equipment costs $75,000 and requires $5,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. The old piece of equipment was purchased 4 years ago for an installed cost of $50,000; it was being depreciated under MACRS using a 5-year recovery period. The old equipment can be sold today for $55,000 net of any removal or cleanup costs. As a result of the proposed replacement, the firm's investment in net working capital is expected to increase by $15,000. The firm pays taxes at a rate of 40%.

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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Pilot Plus Pens is deciding when to replace its old machine. The old machine's current salvage value is $3 million. Its current book value is $2 million. If not sold, the old machine will require maintenance costs of $500,000 at the end of the year for the next five years. Depreciation on the old machine is $400,000 per year. At the end of five years, the old machine will have a salvage value of $400,000 and a book value of $0. A replacement machine costs $4 million now and requires maintenance costs of $350,000 at the end of each year during itsfeconomic life of five years. At the end of the five years, the new machine will have a salvage value of $1,000,000. It will be fully depreciated by the straight-line method. In five years, a replacement machine will cost $5,000,000. Pilot will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 28 percent and the appropriate discount rate is 10 percent. The company is assumed to earn sufficient…
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A company is thinking when to replace its old machine. It has two choices: replace the old machine now, or replace it at the end of seven years. Currently, the old machine has a salvage value of $3 million and book value of $1.5 million. If it is not sold, it will require maintenance costs of $770,000 at the end of the year over the nextsix years. The depreciation expense for the machine is $300,000 per year. At the end of six years, the machine will have a salvage value of only $100,000 and a book value of $0. If the company replaces the old machine now, the new machine will cost $4.9 million and will require maintenance costs of $320,000 at the end of each year during its six years economic life. At the end of six years, the new machine will have a salvage value of $900,000. It willbe fully depreciated using the straight-line method. If the company replaces the old machine in six years, a new machine will cost $3.5 million. The company will need to purchase this machine regardless of…
Three years ago, Zush company purchased a piece of equipment for $80,000 that was expected to have a useful life of 5 years with a $9000 salvage value. Increased demand necessitated an upgrade costing $30,000 one year ago. Technology changes now require that the equipment be upgraded again for another $25,000 so that it can be used for 3 more years. Its annual operating cost will be $48,000 and it will have a $19,000 salvage value after 3 years. Alternatively, it can be replaced with new equipment that will cost $68,000 with operating costs of $35,000 per year and a salvage value of $21,000 after 3 years. If replaced now, the existing equipment will be sold for $12,000. What is the AW of of the existing equipment at i-10%? O Less than (-$50,000) between (-50,000) to (-60,000) O between (-40,000) to (-50,000) between (-30,000) to (-40,000)
Benson Enterprises is deciding when to replace its old machine. The machine’s current salvagevalue is $1.2 million. Its current book value is $1 million. If not sold, the old machine will requiremaintenance costs of $420,000 at the end of the year for the next five years. Depreciation on theold machine is $200,000 per year. At the end of five years, it will have a salvage value of $220,000.A replacement machine costs $3.5 million now and requires maintenance costs of $160,000 at theend of each year during its economic life of five years. At the end of five years, the new machinewill have a salvage value of $540,000. It will be fully depreciated using the three-year MACRSschedule. In five years a replacement machine will cost $4,000,000. Pilot will need to purchasethis machine regardless of what choice it makes today. The corporate tax is 35 percent and theappropriate discount rate is 10 percent. The company is assumed to earn sufficient revenues togenerate tax shields from…
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The Fundamental Review of the Trading Book (Basel regulations) includes rules on how assets can be allocated to the banking book or the trading book. Give one example where one type of risk can be classified as another.
Freida Company is considering an asset replacement project ofreplacing a control device. This old control device has been fullydepreciated but can be sold for $5,000. The new control device, whichis more automated, will cost $42,000. The new device’s installation andshipping costs will total $16,000. The new device will be depreciatedon a straight-line basis over its 2-year economic life to an estimatedsalvage value of $0. The actual salvage value of this device at the endof 2-year period (That is, the market value of the device at the end of2-year period) is estimated to be $4,000. If the replacement project is accepted, Freida will require an initial working capital investment of$2,200 (that is, adding $2,200 initially to its net working capital).During the 1st year of operations, Freida expects its annual revenue toincrease from $72,800 to $90,000. After the 1st year, revenues fromthe replacement are expected to increase at a rate of $2,800 a year forthe remainder of the project…
Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 4 years ago at an installed cost of $20,600; it was being depreciated under MACRS using 5-year recovery period. Percentage by recovery year* Recovery year 3 years 5 years 7 years 10 years 1 33% 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 9 6% 10 6% 11 4% Totals 100% 100% 100% 100% The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $36,000 and requires $5,500 in installation costs; it will be depreciated using a 5-year recovery period under…
Assume that a firm expects to be able to liquidate the new machine, which cost $400, 000, at the end of its 5- year usable life to net $42, 000 after paying removal and cleanup costs. Had it not been replaced by the new machine, the old machine, which initially cost $240,000 and was used for 3 years before being replaced, would have been liquidated at the end of the 5 years (i. e., the same time the new machine is liquidated) to net $ 10,000. The firm expects to recover its $17,000 net working capital investment upon termination of the project. The firm pays taxes at a rate of 40%. The firm depreciated both machines using a 5-yr MACR schedule as follows: 20%, 32%, 19%, 12%, 12%, 5%. Calculating the terminal cash flow for this machine.

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