Letang Industrial Systems Company (LISC) is trying to decide between two differentconveyor belt systems. System A costs $325,000, has a four-year life, and requires$121,000 in pretax annual operating costs. System B costs $405,000, has a six-year life,and requires $115,000 in pretax annual operating costs. Suppose the company alwaysneeds a conveyor belt system; when one wears out, it must be replaced. Assume the taxrate is 22 percent and the discount rate is 11 percent.Calculate the EAC for both conveyor belt systems. (A negative answer should beIndicated by a minus sign. Do not round Intermediate calculations and round youranswers to 2 decimal places, e.g., 32.16.)System ASystem B

To calculate the Equivalent Annual Cost (EAC) for each conveyor belt system, need to consider both…

Answered: Letang Industrial Systems Company…

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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You are evaluating a project for The Farstroke golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Farstroke to be $400 per unit and sales volume to be 1,000 units in year 1; 1,500 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets, which can be depreciated using bonus depreciation. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?
"I'm not sure we should lay out $335,000 for that automated welding machine," said Jim Alder, president of the Superior Equipment Company. "That's a lot of money, and it would cost us $91,000 for software and installation, and another $56,400 per year just to maintain the thing. In addition, the manufacturer admits it would cost $54,000 more at the end of three years to replace worn-out parts." "I admit it's a lot of money," said Franci Rogers, the controller. "But you know the turnover problem we've had with the welding crew. This machine would replace six welders at a cost savings of $121,000 per year. And we would save another $8,200 per year in reduced material waste. When you figure that the automated welder would last for six years, I'm sure the return would be greater than our 18% required rate of return." "I'm still not convinced," countered Mr. Alder. "We can only get $20,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will…
You are evaluating a project for The Farstroke golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Farstroke to be $450 per unit and sales volume to be 1,200 units in year 1; 1,325 units in year 2; and 1,000 units in year 3. The project has a 3-year life. Variable costs amount to $250 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $150,000 in assets, which can be depreciated using bonus depreciation. The actual market value of these assets at the end of year 3 is expected to be $30,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What is the operating cash flow for the project in year 2? Note: Enter your answer as a whole number. Operating cash flow
The new machine would require two skilled operators (one per shift), each receiving $24.00 an hour (including benefits), and contract maintenance of $110,000 a year, and would incur power costs of $37,000 yearly. In addition, the automatic machine was expected to save at least $40,000 yearly through improved labor efficiency in other areas of the production. Certain aspects of the Viva purchase decision were difficult to quantify. First, Steven was unsure whether the tough collective-bargaining agreement his company had with the employees' union would allow him to lay off the 24 operators of the semiautomated machines. Reassigning the workers to other jobs might be easier, but the only positions needing to be filled were unskilled jobs, which paid $12.00 an hour. The extent of any labor savings would depend on negotiations with the union. Second, Steven believed that the Viva would result in even higher levels of product quality and lower defect rates than the company was now boasting.…
Trader Bubba Industries must choose between solar and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The solar truck will cost more but will be less expensive to operate; it will cost $70,000, whereas the electric-powered truck will cost $60,000. The life for both types of truck is estimated to be 8 years, during which time the net cash flows for the solar-powered truck will be $20,000 per year and those for the electric-powered truck will be $12,000 per year. Trader Bubba Industries’ assets are $400 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts are as follows: Bank loans: $50 million borrowed at 6% Bonds: $200 million, paying 8% coupon with semi-annual payments, and maturity of 10 years. Trader Bubba sold its $1,000 par-value bonds for $1020 and had to incur $20 flotation cost per bond.…
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.
Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the SAL 5000 and the HAL 1000. The company would need nine SALs, and each SAL costs $3,250 and requires $300 of maintenance each year. At the end of the computer’s eight-year life, each one could be sold for $195. Alternatively, the company could buy seven HALs. Each HAL costs $3,600 and requires $355 of maintenance every year. Each HAL lasts for six years and has a resale value of $140 at the end of its economic life. The company will continue to purchase the model that it chooses today into perpetuity, and the tax rate is 25 percent. Assume that the maintenance costs occur at year-end. Depreciation is straight-line to zero. What is the EAC of each model if the appropriate discount rate is 12 percent? (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Consider a drill press containing three drill bits. The current policy (called individual replacement) is to replace a drill bit when it fails. The firm is considering changing to a block replacement policy in which all three drillbits are replaced whenever a single drill bit fails. Each time the drill press is shut down, the cost is $100. A drill bit costs $50, and the variable cost of replacing a drill bit is $10. Assume that the time to replace a drill bit isnegligible. Also, assume that the time until failure for a drill bit follows an exponential distribution with a mean of 100 hours. This can be modeled in @RISK with the formula 5RISKEXPON (100). (Note: If you have the academic version of @RISK, this problem will require more RISKEXPON functions than the 100 allowed, but there is an easy workaround. An exponentially distributed random variable can be generated with Excel functions only using the formula =-Mean*LN(RAND()). Then @RISK can still be used to run the simulation.)…
“I’m not sure we should lay out $350,000 for that automated welding machine,” said Jim Alder, president of the Superior Equipment Company. “That’s a lot of money, and it would cost us $94,000 for software and installation, and another $60,000 per year just to maintain the thing. In addition, the manufacturer admits it would cost $57,000 more at the end of three years to replace worn-out parts.” “I admit it’s a lot of money,” said Franci Rogers, the controller. “But you know the turnover problem we’ve had with the welding crew. This machine would replace six welders at a cost savings of $124,000 per year. And we would save another $8,500 per year in reduced material waste. When you figure that the automated welder would last for six years, I’m sure the return would be greater than our 15% required rate of return.” “I’m still not convinced,” countered Mr. Alder. “We can only get $22,000 scrap value out of our old welding equipment if we sell it now, and in six years the new machine…
Letang Industrial Systems Company (LSC) is trying to decide between two different conveyor belt systems. System A costs $325,000, has a four-year life, and requires $121,000 in pretax annual operating costs. System B costs $405,000, has a sle-year life. and requires $115,000 in pretax annual operating costs. Suppose the company always needs a conveyor belt system when one wears out, it must be replaced. Assume the tax rate is 22 percent and the discount rate is 11 percent Calculate the EAC for both conveyor belt systems. (A negative answer should be Indicated by a minus sign. Do not round Intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) System A System D 11:36 AM/
Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $335,000, has a four-year life, and requires $129,000 in pretax annual operating costs. System B costs $415,000, has a six-year life, and requires $123,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever project is chosen, it will not be replaced when it wears out. The tax rate is 24 percent and the discount rate is 9 percent. Calculate the NPV for both conveyor belt systems. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) System A System B
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $325,000, has a 4-year life, and requires $121,000 in pretax annual operating costs. System B costs $405,000, has a 6-year life, and requires $115,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 22 percent and the discount rate is 11 percent. Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset falls into the 3-year MACRS class (MACRS schedule). The project is estimated to generate $1,810,000 in annual sales, with costs of $700,000. The project requires an initial investment in net working capital of $450,000, and the fixed asset will have a market…

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