Hi expart Provide correct answer for this question Quip Corporation wants to purchase a new machine for$300,000. Management predicts that the machine willproduce sales of $200,000 each year for the next 5 years.Expenses include direct materials, direct labor, and factoryoverhead (excluding depreciation), totaling $80,000 peryear. The firm uses straight-line depreciation with anassumed residual (salvage) value of $50,000. Quip'scombined income tax rate, t, is 40%.Management requires a minimum after-tax rate of return of10% on all investments. What is the proposed investment'sestimated net present value (NPV) (rounded to the nearesthundred)? (The PV annuity factor for 10%, 5 years, is 3.791,and for 4 years, it is 3.17. The present value of $1 factor for10%, 5 years, is 0.621.) Assume that after-tax cash inflowsoccur at year-end.A. $48,800B. $99,000C. $112,000D. $79,800

Step 1: Calculate Annual After-Tax Cash Flows\ Sales: $200,000Expenses: $80,000Depreciation:…

Answered: Quip Corporation wants to purchase a…

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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The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
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?
Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and Machine 360-6, which has a cost of $360,000, a 6-year life, and after-tax cash flows of $98,300 per year. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Filkins’ cost of capital is 14%. Should the firm replace its old knitting machine? If so, which new machine should it use? By how much would the value of the company increase if it accepted the better machine? What is the equivalent annual annuity for each machine?
After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend 900,000 for new mining equipment and pay 165,000 for its installation. The mined gold will net the firm an estimated 350,000 each year for the 5-year life of the vein. CTCs cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. a. What are the projects NPV and IRR? b. Should this project be undertaken if environmental impacts were not a consideration? c. How should environmental effects be considered when evaluating this or any other project? How might these concepts affect the decision in part b?
Utica Machinery Company purchases an asset for 1,200,000. After the machine has been used for 25,000 hours, the company expects to sell the asset for 150,000. What is the depreciation rate per hour based on activity?
Pique Corporation plans to purchase a new machine for $300,000. Management estimates that with the machine cash flows from sales will increase by $160,000 each year for the next 5 years. Expenses to generate the additional sales include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $70,000 per year. The firm uses straight-line depreciation with no terminal disposal value for all depreciable assets. The new machine has an expected salvage value of zero at the end of the project. Pique's combined income tax rate is 20%. Management requires a minimum after-tax rate of return of 8% on all investments.a. Calculate the Net Present Value (NPV) for this project.
Lakeside Inc. is considering replacing old production equipment with state-of-the-art technology that will allow production cost savings of $10,000 per month. The new equipment will have a five-year life and cost $420,000, with an estimated salvage value of $33,000. Lakeside's cost of capital is 7%. Lakeside Inc. uses a straight-line depreciation method. Required: Calculate the payback period and the accounting rate of return for the new production equipment. (Round your answers to 2 decimal places.) Payback period Accounting rate of return years %
B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $384,000 with a 10-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 153,600 units of the equipment’s product each year. The expected annual income related to this equipment follows. Sales $ 240,000 Costs Materials, labor, and overhead (except depreciation on new equipment) 84,000 Depreciation on new equipment 38,400 Selling and administrative expenses 24,000 Total costs and expenses 146,400 Pretax income 93,600 Income taxes (40%) 37,440 Net income $ 56,160 If at least an 9% return on this investment must be earned, compute the net present value of this investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $376,000 with a 8-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 150,400 units of the equipment's product each year. The expected annual income related to this equipment follows. Sales Costs Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (30%) Net income If at least an 9% return on this investment must be earned, compute the net present value of this investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Chart Values are Based on: Select Chart Net present value n = j= Amount % X PV Factor = Present Value $ $ 235,000 82,000 47,000 23,500 152,500 82,500 24,750 $ 57,750 0
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.
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. a. Calculate the terminal cash flow for a usable life of (1) 3 years, (2) 5 years, and (3) 7 years. The following table can be used to solve for the terminal cash flow: (Round to the nearest dollar.) 3-year Proceeds from sale of proposed asset $ +/- Tax on sale of proposed asset $ Total after-tax proceeds-new $ + Change in net working capital $…
RocketOwl, Inc. is considering a new product to bring to market. They estimate the product would have a viable market for five years. If they wish to do the project they will need to purchase equipment with a price of $2,382,577. The firm will use straight-line depreciation to a value of $500,000 and assume the equipment will have a pre-tax salvage value of $525,713. They estimate revenue and costs for the project as presented in the table: Operating Year Revenue Costs 1 $382,453 $83,584 2 $813,583 $357,524 3 $2,660,542 $983,205 4 $969,840 $219,944 5 $382,453 $83,584 RocketOwl, Inc. expects the project will need initial inventory for the project of $100,851, and this amount will stay constant throughout the project. They also expect in the investment year the project will generate accounts receivable of $66,881 and accounts payable of $37,764. They also assume that the project will generate accounts payable each year equal to 0.17 of annual sales and accounts payable…

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