Ogren Corporation is considering purchasing a new spectrometer for the firm's R&D department. The purchase price is $70,000 and it would cost another $15,000 to install it. The spectrometer which falls into the MACRS 3-year property class (Year 1-33.33%, Year 2-44.44%, Year 3 - 14.82%, and Year 4 -7.41%) is projected to be sold after three years for $30,000. Use of this equipment would result in an increased net working capital of $4,000 over the life of the machine. The spectrometer would have no effect on revenues, but it is expected to save the firm $35,000 per year in before-tax operating costs, mainly labor. The firm's tax rate is 40%, and the required rate of return on the project is 11%. What amount should be used as the initial cash flow for this project? Why?

Ogren Corporation is considering purchasing a new spectrometer for the firm's R&D department. The purchase price is $70,000 and it would cost another $15,000 to install it. The spectrometer which falls into the MACRS 3-year property class (Year 1-33.33%, Year 2-44.44%, Year 3 - 14.82%, and Year 4 -7.41%) is projected to be sold after three years for $30,000. Use of this equipment would result in an increased net working capital of $4,000 over the life of the machine. The spectrometer would have no effect on revenues, but it is expected to save the firm $35,000 per year in before-tax operating costs, mainly labor. The firm's tax rate is 40%, and the required rate of return on the project is 11%. What amount should be used as the initial cash flow for this project? Why?

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 potential investment in equipment. The equipment's basic price is $158,000, and shipping costs will be $6,300. It will cost another $15,800 to modify it for special use by your firm, and an additional $7,900 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 26,300 at the end of three years. The equipment is expected to generate revenues of $147,000 per year with annual operating costs of $75,000. The firm's marginal tax rate is 25.0%. What is the after-tax operating cash flow for year 3? $61,050 $32,850 $72,000 $43,800 $28,200
A proposed cost-saving device has an installed cost of $795,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $79,000, the tax rate is 22 percent, and the project discount rate is 11 percent. The device has an estimated Year 5 salvage value of $121,000. What level of pretax cost savings do we require for this project to be profitable? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Answer is complete but not entirely correct. Pretax cost savings $ 194.191.50 X
The Ingersoll Engineering Company is considering the purchase of a gas flow meter. Its purchase price is $9,500 and another $500 will be spent shipping and installing this device. Use of the meter is expected to result in a $9,000 annual increase in revenue, and operating expenses are estimated to be $5,000 per year. The meter will be used for five years, and then it will be sold for an estimated market value of $2,500. The meter’s MACRS property class is five years. Determine the after-tax IRR on this investment if the effective income tax rate (t) is 40%. If the after-taxMARR is 10%, should this gas flow meter be purchased, installed and utilized by the company? What is the payback period based on the after-tax cash flows?
Casa Grande Farms is considering purchasing multiple tractors for a total purchase price of $540,000. These tractors are expected to generate EBITDA of $250,000 for each of the next three years. Casa Grande Farms has a 21% tax rate and has a cost of capital of 10%. Assuming that Casa Grande Farms depreciates these tractors using MACRS depreciation method for three-year property starting immediately, then the NPV of buying the tractors is closest to: $20,785. $81.715. $560,785. $54,965. $513,235.
You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $210,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $91,000. The equipment would require a $9,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $26,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar.$ 2.What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.Year 1: $ Year 2: $ Year 3: $
XYZ Co. is considering the purchase of a new machine. The machine will cost $250,000 and requires installation costs of $25,000. The existing machine can be sold currently for $25,070. It was purchased three years ago for $83,000 and depreciated using MACRS (5 years). It can be operated for another four years. Its market value at that time, if sold, would be $14,000. The new machine has expected life of five years and expected to provide operating cash savings of $88,000 a year for 2 years and $50,000 a year for the next two years before depreciation and taxes (EBD&T). After four years the new machine can be sold for $12,750. To support the increased business resulting from the purchase of new machine, A/R will increase by $12,000; inventory will increase by $25,000 and current liabilities by $41,000. The cost of capital is 17% and the tax rate is 40%. What is NPV? Question 9 options: $56,900 -$65,880 -$63,118 -$76,890
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,000,000, and it would cost another $20,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $576,000. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $424,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%. Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. What is the Year-0 net cash flow? $ If the project's cost of capital is 11 %, what is the NPV of the project? $
You are evaluating a potential investment in equipment. The equipment's basic price is $163,000, and shipping costs will be $4,900. It will cost another $21,200 to modify it for special use by your firm, and an additional $8,200 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 29,600 at the end of three years. The equipment is expected to generate revenues of $151,000 per year with annual operating costs of $77,000. The firm's marginal tax rate is 40.0%. What is the after-tax operating cash flow for year 2? $79,914 -$8,871 $74,000 -$14,785 $88,785
You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $100,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $28,000. The equipment would require a $12,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $22,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.
A Funiture Factory is considering buying a new automated planing machine for a cost of $80,250. This price includes a complete guarantee of the maintenance costs for the first two years, and it covers a good proportion of the maintenance costs for years 3 and 4. The company’s portion of the maintenance cost is estimated to be $1,000 in year 3 and $3,000 in year 4. Depreciation on the capital cost would be 7% per year. Determine the Economic Life and EAC* of the new machine assuming the MARR is 6.5% and that there will be an installation cost of $2,800. PLEASE PLEASE SHOW FULL DETAILED STEPS
Looner Industries is currently analyzing the purchase of a new machine that costs $158,000 and requires $19,900 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $29,600 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a five-year recovery period (see the table attached for the applicable depreciation percentages) and expects to sell the machine to net $10,300 before taxes at the end of its usable life. The firm is subject to a 21% tax rate c. Assuming a five-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $8,895 or (2) $169,900 (before taxes) at the end of five years. d. Discuss the effect of sale price on terminal cash flow using your findings in part c.
Crane Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $11.85 million. This investment will consist of $2.70 million for land and $9.15 million for trucks and other equipment. The land, all trucks, and all other equipment are expected to be sold at the end of 10 years for a price of $5.05 million, which is $2.50 million above book value. The farm is expected to produce revenue of $2.00 million each year, and annual cash flow from operations equals $1.80 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment. (Do not round factor values. Round final answer to 2 decimal places, e.g. 15.25.) NPV The project should be

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