Pharoah Inc. produces modern light fixtures that sell for $160 per unit. The firm's management is considering purchasing a high-capacity manufacturing machine. If the high-capacity machine is purchased, then the firm's annual cash fixed costs will be $71,000 peryear, variable costs will be $80 per unit, and annual depreciation and amortization expenses will equal $20,000. If the machine is notpurchased, annual cash fixed costs will be $15,000, variable costs will be $130 per unit, and annual depreciation and amortizationexpenses will equal $11,000.What is the minimum level of unit sales necessary in order for EBIT with the high-capacity machine to be higher than EBIT withoutthat machine?Minimum level of sales requiredunits

To determine the minimum level of unit sales necessary for EBIT (Earnings Before Interest and Taxes)…

Answered: Pharoah Inc. produces modern light…

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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Beryl's Iced Tea currently rents a bottling machine for $52,000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options: a. Purchase the machine it is currently renting for $160,000. This machine will require $20,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $265,000. This machine will require $17,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also, $35,000 will be spent up front to train the new operators of the machine. Suppose the appropriate discount rate is 8% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the cost of the rental machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The marginal corporate tax rate is 25%. The NPV of renting…
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