Mom's Cookies, Inc., is considering the purchase of a new cookie oven. The original cost of the old oven was $47,000; it is now fiveyears old, and it has a current market value of $21,000. The old oven is being depreciated over a 10-year life toward a zero estimatedsalvage value on a straight-line basis, resulting in a current book value of $23,500 and an annual depreciation expense of $4,700. Theold oven can be used for six more years but has no market value after its depreciable life is over. Management is contemplating thepurchase of a new oven whose cost is $27,000 and whose estimated salvage value is zero. Expected before-tax cash savings from thenew oven are $3,200 a year over its life, you can use bonus depreciation on the oven, and the cost of capital is 10 percent. Assume a21 percent tax rate.What will the cash flows for this project be? (Note that the $47,000 cost of the old oven is depreciated over ten years at $4,700 peryear. The half-year convention is not used for the old oven. Negative amounts should be indicated by a minus sign. Do not roundIntermediate calculations and round your answers to 2 decimal places.)FCFYear23

The free cash flow is the amount of cash left over after the company has paid its operational and…

Answered: Mom's Cookies, Inc., is considering the…

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 Cornchopper Company is considering the purchase of a new harvester. • The new harvester is not expected to affect revenue, but operating expenses will be reduced by $13,600 per year for 10 years. • The old harvester is now 5 years old, with 10 years of its scheduled life remaining. It was originally purchased for $74,000 and has been depreciated by the straight- line method. • The old harvester can be sold for $21,600 today. • The new harvester will be depreciated by the straight-line method over its 10-year life. • The corporate tax rate is 21 percent. . The firm's required rate of return is 15 percent. • The initial investment, the proceeds from selling the old harvester, and any resulting tax effects occur immediately. • All other cash flows occur at year-end. . The market value of each harvester at the end of its economic life is zero.
2. The Kish Corporation is considering the purchase of a new commercial oven. The original cost of the company's existing oven was $250,000. The machine is now 10 years old and has a current market value of $50,000. The old oven is being depreciated over a 15-year useful life to a zero estimated salvage value on a straight-line basis. Management is contemplating the purchase of a new oven that costs $375,000 with an estimated salvage value of $25,000. Expected cash savings from the new oven are $45,000 a year (before tax), and the oven will require the company to increase working capital by $15,000. Depreciation is on a straight-line basis over a 5-year life, and the cost of capital is 9.50%. Assume a 21% tax rate. a. What is the net present value of the new machine? Should the replacement be made? b.
The Seliger Company has a building that it originally bought for $100,000. As of December 31, 2012, there is $10,000 of Accumulated Depreciation on the building (it was being straight-line depreciated over 10 years with no salvage value). On January 1, 2013, Seliger decides to change the remaining useful life to 5 years (starting now) with a $50,000 salvage value. What will be the depreciation on the building in 2013? $20,000 $10,000 $8,000 $12,500 $13,000 O O O O O
St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $181,500 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $28,000 to $73,500 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 25%, and the project cost of capital is 10%. What is the NPV if the firm replaces the old welder with the new one? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign.
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $65,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $6,500 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency digital-controlled flange-lipper can be purchased for $110,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $35,000 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 $45,000. The firm's tax rate is 25%, and the appropriate cost of capital…
A civil engineer who owns his own design/build/operate company purchased a small crane 3 years ago at a cost of $65,000. At that time, it was expected to be used for 10 years and then traded in for its salvage value of $10,000. Due to increased construction activities, the company would prefer to trade for a new, larger crane now, which will cost $80,000. The company estimates that the old crane can be used, if necessary, for another 3 years, at which time it would have a $17,000 estimated market value. Its current market value is estimated to be $29,000, and if it is used for another 3 years, it will have M&O costs (exclusive of operator costs) of $17,000 per year. Determine the values of P, n, S, and AOC that should be used for the existing crane in a replacement analysis. The value of P is $ . The value of n is years. The value of S is $ . The AOC value is $ per year.
Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000. Today, that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.51 million. What amount should be used as the initial cash flow for this project?
East Mill Pizzeria is closing its business. It sold its two-year- old pizza ovens to Marco's Italian Restaurant for $600,000. Originally, East Mill acquired the pizza ovens at a cost of $800,000. The ovens had an estimated useful life of 10 years, an estimated residual value of $50,000, and were depreciated using straight-line depreciation. Complete the requirements below for East Mill Pizzeria. Required: 1. Calculate the balance in the accumulated depreciation account at the end of the second year. Accumulated depreciation
The Everly Equipment Company’s flange-lipping machine was purchased 5 years ago for $55,000. It had an expected life of 10 years when it was bought, and its remaining depre-ciation is $5,500 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency, digital-controlled flange-lipper can be purchased for $120,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $30,000 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 $35,000. The firm’s tax rate is 25%, and the appropriate cost of…
St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $181, 500 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $28,000 to $73, 500 per year. The new machine will be depreciated over its 5- year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52 %, 11.52 %, and 5.76%. The applicable corporate tax rate is 25%, and the project cost of capital is 10%. What is the NPV if the firm replaces the old welder with the new one? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign. F1 Inflation Adjustments The Rodriguez Company is…
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The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $600 for 5 years and $310 for the sixth year. Its current book value is $3,310, and it can be sold on an Internet auction site for $3,850 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life. Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $11,500, and has an estimated useful life of 6 years with an estimated salvage value of $1,600. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much greater efficiency would reduce operating expenses by $1,600 per year. To support the…

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