Please correct answer and don't use hand raiting ot AnsweredeBookRader Railway is determining whether to purchase a new rail setter, which has a base price of $394,000 and would cost another $58,000 to install. The setter will be depreciated accordingto the MACRS 3-year class of assets, and it would be sold after three years for $196,000. Using the setter requires a $26,000 increase in net working capital. Although it would have noeffect on revenues, the setter should save the firm $171,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rateof return is 13 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, ifany.The setter -Select-be purchased because the net present value, that is $is -Select-zero.

The net present value (NPV) of the project is $16,177.10.Since the NPV is greater than zero, the…

Answered: ot Answered eBook Rader Railway is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $394,000 and would cost another $58,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $196,000. Using the setter requires a $26,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $171,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 13 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any. The setter **(SHOULD/SHOULD NOT)** be purchased because the net present value, that is (Greater than/Less than/Equal to) is zero. $
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $394,000 and would cost another $58,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $196,000. Using the setter requires a $26,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $171,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 13 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any. The setter_____________ be purchased because the net present value, that is $__________ , is ______ zero.
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $421,000 and would cost another $49,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $214,000. Using the setter requires a $20,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $179,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 15 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any. The setter be purchased because the net present value, that is $ , is zero.
The Wellington Construction Company is considering acquiring a new earthmover. The mover’sbasic price is $90,000, and it will cost another$18,000 to modify it for special use by the company.This earthmover falls into the MACRS five-yearclass. It will be sold after four years for $30,000. Thepurchase of the earthmover will have no effect onrevenues, but it is expected to save the firm $35,000per year in before-tax operating costs, mainly labor.The firm’s marginal tax rate (federal plus state) is40%, and its MARR is 10%.(a) Is this project acceptable, based on the mostlikely estimates given?(b) Suppose that the project will require an increasein net working capital (spare-parts inventory) of$5,000, which will be recovered at the end ofyear 4. Taking this new requirement into account,would the project still be acceptable?(c) If the firm’s MARR is increased to 18% and withthe working capital requirement from (b) not ineffect, what would be the required savings inlabor so that the project…
Marchal Company is evaluating the proposed acquisition of a new machine. The machine's base price is $240,000, and it would cost another $15,000 to modify it for special use. The machine falls into the MTheACRS 3-year class, and it would be sold after 2 years for $65,000. The machine would require an increase in net working capital of $5,000. The machine would have no effect on revenues, but it is expected to save the firm $80,000 per year for 2 years in before-tax operating costs. The company's marginal tax rate is 21% and its cost of capital is 11%. A. Calculate the cash outflow at time zero.B. Calculate the net operating cash flows for Years 1 and 2.C. Calculate the non-operating terminal year cash flow.
HNH Corporation is evaluating a new project with an expected life of 4 years. The project requires an investment in a new plant. HNH can either borrow the money to buy the plant or lease the plant from its manufacturer. The details of each alternative are shown as follows: Purchase: The purchase price of the plant is $800,000 and is expected to have a salvage value of $50,000 after 4 years. The plant qualifies for 25% reducing balance depreciation if owned. Lease: The lease involves four annual payments in arears of $150,000 payable at the end of each year, and a residual payment of $30,000 payable at the end of the lease term, i.e., at the end of year 4. The company tax rate is 30%. The borrowing rate is 8% per annum. Calculate the NPV of leasing and advise the company as to whether it should purchase or lease the plant.
Winneconne Company is considering replacing a machine with a book value of $400,000, a remaining useful life of 5 years, and annual straight-line depreciation of $80,000. The existing machine has a current market value of $400,000. The replacement machine would cost $550,000, have a 5-year life, and save $75,000 per year in cash operating costs. If the replacement machine would be depreciated using the straight-line method and the tax rate is 30%, what would be the net investment required to replace the existing machine?
Louie's Leisure Products is considering a 4-year project which will require the purchase of $1.2 million in new equipment. The project will use existing land for a warehouse. The market value of the land is $1 million and is expected to remain unchanged in the future. The equipment will be depreciated straight-line to a book value of $0.2 million over the 4-year life of the project. Louie's expects to sell the equipment at the end of the project for 25% of its original cost. Annual sales from this project are estimated at $1.2 million. The operating cost is 25% of the sales revenue. Net working capital equal to 20% of sales will be required to support the project. The firm desires a 10% rate of return on this project. The tax rate is 40%. Should Louie's Leisure Products accept the project?
Maize Company is considering purchasing a new machine as a capital investment. The details of the new machine are summarized below: The cost of the machine will be $400,000. The machine has a useful life of five (5) years. The cost of the machine will be depreciated on a straight-line basis to a terminal disposal value of zero. The investment requires working capital of $30,000 upon purchase of the new machine. This working capital is expected to be fully recovered at the end of the project. The annual cost savings if the new machine is acquired will be $95,000. The machine’s salvage value at the end of five years is expected to be $15,000. Maize pays taxes at a rate of 35%. Maize has a required rate of return of 8%. a. Calculate the net present value (NPV) of the project (round your solution to dollars). Calculate the net present value (NPV) of the project (round your solution to dollars). What is the payback period of the project (round your solution to two decimal places)?…
Aurora is considering the purchase of a new machine. Its invoice price is $250,000, freight charges are estimated to be $9,000, and installation costs are expected to be $6,000. Salvage value of the new machine is expected to be zero after a useful life of 4 years. Existing equipment could be retained and used for an additional 4 years if the new machine is not purchased. At that time, the salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine would be scrapped. Aurora’s accountant, has accumulated the following data regarding annual sales and expenses with and without the new machine. Without the new machine, Aurora can sell 12,000 units of product annually at a per unit selling price of $80. If the new unit is purchased, the number of units produced and sold would increase by 25%, and the selling price would remain the same. The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old…

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