Question 2 - UNIT 2: CAPITAL BUDGETTING PROCESS UNIT 3: CASH FLOW ESTIMATION Adler is replacing its old packing line with a more efficient line. The old line was being depreciated on a straight-line basis at a rate of $20,000 per year. The old machine has a current book value of $100,000. The new line, which costs $910,000, will be depreciated on a 10-year MACRS schedule. The more efficient operation is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000. a) Compute the net cash flows for Adler in year Assume Adler has a marginal tax rate of 40%. Use the rounded MACRS schedule listed below: (10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%) Kaneb is evaluating two alternative pipeline welders. Welder A costs $310,000, has a 7-year life, and is expected to generate net cash inflows of $78,000 in each of the 7 years. Welder B costs $320,000, has a 5-year life, and is expected to generate annual net cash inflows of $68,900 in each of the 5 years. Kaneb's cost of capital is 16%. b) Using the equivalent annual annuity method, which alternative should be chosen and what is its NPV?
Question 2 - UNIT 2: CAPITAL BUDGETTING PROCESS
UNIT 3: CASH FLOW ESTIMATION
Adler is replacing its old packing line with a more efficient line. The old line was being
value of $100,000. The new line, which costs $910,000, will be depreciated on a 10-year MACRS
schedule. The more efficient operation is expected to increase revenues by $50,000 per year
and reduce annual operating costs by $80,000.
a) Compute the net cash flows for Adler in year
Assume Adler has a marginal tax rate of 40%. Use the rounded MACRS schedule listed below: (10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)
Kaneb is evaluating two alternative pipeline welders. Welder A costs $310,000, has a 7-year life, and is expected to generate net
7 years. Welder B costs $320,000, has a 5-year life, and is expected to generate
annual net cash inflows of $68,900 in each of the 5 years. Kaneb's cost of capital is 16%.
b) Using the equivalent annual
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