Medavoy Company is considering a new project that complements its existing business.The machine required for the project costs $4.7 million. The marketing departmentpredicts that sales related to the project will be $2.83 million per year for the next fouryears, after which the market will cease to exist. The machine will be depreciated to zeroover its 4-year economic life using the straight-line method. Cost of goods sold andoperating expenses related to the project are predicted to be 30 percent of sales. Thecompany also needs to add net working capital of $210,000 immediately. The additionalnet working capital will be recovered in full at the end of the project's life. The corporatetax rate is 22 percent and the required return for the project is 13 percent. What is thevalue of the NPV for this project? (Do not round intermediate calculations and enteryour answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)NPVShould the company proceed with the project?Yes○ No

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Answered: Medavoy Company is considering a new…

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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A company is considering replacing an old piece of machinery, which cost $600,000and has $350,000 of accumulated depreciation to date, with a new machine that has apurchase price of $545,000. The old machine could be sold for $231,000. The annualvariable production costs associated with the old machine are estimated to be $61,000per year for eight years. The annual variable production costs for the new machine areestimated to be $19,000 per year for eight years. a.) Prepare and show in solution a differential analysis dated September 13 on whetherto continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). b.) What is the sunk cost in the scenario?
Sheridan Company has a factory machine with a book value of $150,000 and a remaining useful life of 4 years. A new machine is available at a cost of $245,000. This machine will have a 4-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $590,000 to $490,000. Prepare an analysis that shows whether Sheridan should retain or replace the old machine. (If an amount reduces the net income then enter with a negative sign preceding the number or parenthesis, e.g. -15,000, (15,000).) Variable costs New machine cost $ $ Keep Equipment $ $ Replace Equipment $ $ Net Income Increase (Decrease) Activate Windo Go to Settings to ac
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Meman
Medavoy Company is considering a new project that complements its existing business. The machine required for the project costs $4.5 million. The marketing department predicts that sales related to the project will be $2.67 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its 4-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 30 percent of sales. The company also needs to add net working capital of $190,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 23 percent and the required return for the project is 13 percent. What is the value of the NPV for this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
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1. Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.82 million. The marketing department predicts that sales related to the project will be $2.52 million per year for the next four years, after which the firm expects to sell it for $500,000. The machine is a five-year class asset and will be depreciated down to zero over five years under the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. Howell also needs to add net working capital of $200,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35 percent. The required rate of return (or discount rate) for the project is 12.5 percent. Compute the NPV, IRR, and payback period of the project. The firm’s acceptable payback period is 3 years. Is this project acceptable to the firm?
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