Philadelphia Fastener Corporation manufactures nails, screws, bolts, and other fasteners. Management Is proposal to acquire new material-handling equipment. The new equipment has the same capacity as the current equipment but will provide operating efficiencies in labor and power usage. The savings in operating costs are estimated at $140,000 annually. The new equipment will cost $400,000 and will be purchased at the beginning of the year when the project is started. The equipment dealer is certain that the equipment will be operational during the second quarter of the year it is installed. Therefore, 60 percent of the estimated annual savings can be obtained in the first year. The company will incur a one-time expense of $40,000 to transfer production activities from the old equipment to the new equipment. No loss of sales will occur, however, because the processing facility is large enough to install the new equipment without interfering with the operations of the current equipment. The equipment is in the MACRS 7-year property class. The firm would depreciate the machinery in accordance with the MACRS depreciation schedule. The current equipment has been fully depreciated. Management has reviewed its condition and has concluded that it can be used an additional eight years. The company would receive $16,000, net of removal costs, if it elected to buy the new equipment and dispose of its current equipment at this time. The new equipment will have no salvage value at the end of its life. The company is subject to a 30 percent income-tax rate and requires an after-tax return of at least 10 percent on any investment. Use Appendix A and Exhibit 16-9 for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Calculate the annual incremental after-tax cash flows for Philadelphia Fastener Corporation's proposal to acquire the new enuinment
Philadelphia Fastener Corporation manufactures nails, screws, bolts, and other fasteners. Management Is proposal to acquire new material-handling equipment. The new equipment has the same capacity as the current equipment but will provide operating efficiencies in labor and power usage. The savings in operating costs are estimated at $140,000 annually. The new equipment will cost $400,000 and will be purchased at the beginning of the year when the project is started. The equipment dealer is certain that the equipment will be operational during the second quarter of the year it is installed. Therefore, 60 percent of the estimated annual savings can be obtained in the first year. The company will incur a one-time expense of $40,000 to transfer production activities from the old equipment to the new equipment. No loss of sales will occur, however, because the processing facility is large enough to install the new equipment without interfering with the operations of the current equipment. The equipment is in the MACRS 7-year property class. The firm would depreciate the machinery in accordance with the MACRS depreciation schedule. The current equipment has been fully depreciated. Management has reviewed its condition and has concluded that it can be used an additional eight years. The company would receive $16,000, net of removal costs, if it elected to buy the new equipment and dispose of its current equipment at this time. The new equipment will have no salvage value at the end of its life. The company is subject to a 30 percent income-tax rate and requires an after-tax return of at least 10 percent on any investment. Use Appendix A and Exhibit 16-9 for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Calculate the annual incremental after-tax cash flows for Philadelphia Fastener Corporation's proposal to acquire the new enuinment
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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Transcribed Image Text:Philadelphia Fastener Corporation manufactures nails, screws, bolts, and other fasteners. Management is considering a
proposal to acquire new material-handling equipment. The new equipment has the same capacity as the current equipment
but will provide operating efficiencies in labor and power usage. The savings in operating costs are estimated at $140,000
annually.
The new equipment will cost $400,000 and will be purchased at the beginning of the year when the project is started. The
equipment dealer is certain that the equipment will be operational during the second quarter of the year it is installed.
Therefore, 60 percent of the estimated annual savings can be obtained in the first year. The company will incur a one-time
expense of $40,000 to transfer production activities from the old equipment to the new equipment. No loss of sales will
occur, however, because the processing facility is large enough to install the new equipment without interfering with the
operations of the current equipment. The equipment is in the MACRS 7-year property class. The firm would depreciate the
machinery in accordance with the MACRS depreciation schedule.
ok
nt
ences
The current equipment has been fully depreciated. Management has reviewed its condition and has concluded that it can
be used an additional eight years. The company would receive $16,000, net of removal costs, if it elected to buy the new
equipment and dispose of its current equipment at this time. The new equipment will have no salvage value at the end of its
life. The company is subject to a 30 percent income-tax rate and requires an after-tax return of at least 10 percent on any
investment.
Use Appendix A and Exhibit 16-9 for your reference. (Use appropriate factor(s) from the tables provided.)
Required:
1. Calculate the annual incremental after-tax cash flows for Philadelphia Fastener Corporation's proposal to acquire the new
Onuinment
Transcribed Image Text:1. Calculate the annual incremental after-tax cash flows for Philadelphia Fastener Corporation's proposal to acquire the new
equipment.
2-a. Calculate the net present value of the proposal to acquire the new equipment using the cash flows calculated in
requirement 1. Assume all cash flows take place at the end of the year.
2-b. Should management purchase the new equipment?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2A
Req 2B
Calculate the annual incremental after-tax cash flows for Philadelphia Fastener Corporation's proposal to acquire the new equipmen
dollar.)
Annual Operation
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Ye
Cash operating savings
Less tax effect
Cash savings after tax
Depreciation tax shield
After-tax operating cash flows
<Req 1
Req 2A >
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