Rader Railway is determining whether to purchase a new rail setter, which has a base price of $394,000and would cost another $58,000 to install. The setter will be depreciated according to the MACRS 3-yearclass of assets, and it would be sold after three years for $196,000. Using the setter requires a $26,000increase in net working capital. Although it would have no effect on revenues, the setter should save thefirm $171,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rateis 40 percent, and its required rate of return is 13 percent. Should the setter be purchased? Do not roundintermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negativevalue, if any. The setter **(SHOULD/SHOULD NOT)** be purchased because the net present value, that is(Greater than/Less than/Equal to) is zero.$

NPV is short for net present value. It is one of the most useful capital budgeting techniques to…

Answered: Rader Railway is determining whether to…

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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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.
You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $162,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $111,000. The machine would require a $9,000 increase in net operating working capital (increased Inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $42,000 per year. The marginal tax rate is 25%, and the WACC is 11%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. a. How should the $4,500 spent last year be handled? 1. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay. II. Last year's expenditure is considered an opportunity cost and does not represent an incremental cash flow.…
You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $290,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $48,000. The equipment would require an $8,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $33,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar.$ What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.Year 1: $ Year 2: $ Year 3: $ If the WACC is 12%, should the spectrometer be…
Orchestra Inc. is considering expanding its production capacity. This has therefore called for the immediate purchase of a new plant which cost $50,000,000. This project will generate expected revenue of $19,500,000 per year. It is expected that the project would require $8,300,000 in cost of goods sold and $6,000,000 in operating expenses (excluding depreciation) Orchestra Inc. uses straight line depreciation. The project has useful life of 15 years and the plant has a residual value of $3,000,000 and will be sold at that amount at the end of the project. Orchestra's marginal tax is 30%. Suppose with the added plant, account receivables go up by $1,600,000, inventory shoots up by $1,600,000 and account payables also go up by $2,200,000 Required a) Calculate the free cash flows for the 15-year period of the project. b) Deduce the payback period, Net Project Value (NPV) and the IRR of the project assuming a WACC of 10% c) Should the project be accepted or rejected. Give justification…
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 $425,000 and would cost another $44,000 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 $210,000. Using the setter requires a $29,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $161,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 12 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.
A proposed cost-saving device has an installed cost of $905,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $65,000, the tax rate is 22 percent, and the project discount rate is 9 percent. The device has an estimated Year 5 salvage value of $125,000. What level of pretax cost savings do we require for this project to be profitable? (MACRS schedule) Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Required cost savings
Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Unit sales Sales price Variable cost per unit Fixed operating costs This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project's four-year life. Fox pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be under the new tax law. O $20,571.03 O $27,428.04 O $26,285.20 O $22,856.70 Which of the following most closely approximates what the project's net present value (NPV) would be under the new tax law?(Hint: Round your final answer to two decimal places and choose the value that most closely matches your answer.) Year 1 Year 2 Year 3 3,000 3,250 3,300 $17.25…
APA is planning to expand its operations and plans to purchase a parcel of land on which to construct a building for their review center, which they will need 5 years hence. The current costs are: land: P2M; building: P3.5M. Since these are not needed immediately, the company plans to defer the purchase of the land and the construction of the building until they are needed. If the value of the land and the cost of the building are expected to appreciate at the rates of 10% and 8% per annum, respectively. What will be the total cost of the investment after 5 years? A. P8,580,275.74 B. P7,244,668.37 C. P8,363,668.27 D. None of these
Managers at Eller Manufacturing are considering purchasing a new refrigerated delivery truck that will produce equal annual cash flows of $36,000 for 6 years. The truck's net present value is $12,780, its cost is $144,000, its useful life is 6 years, and its annual depreciation expense (no salvage value) is $24,000. What is the discount rate used by Eller to evaluate this project?
You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $104,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $43,000. The machine would require a $5,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $56,000 per year. The marginal tax rate is 25%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. a. How should the $4,500 spent last year be handled? I. Last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. II. The cost of research is an incremental cash flow and should be included in the analysis. III. Only the tax effect of the research expenses…
ou must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $157,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $86,000. The machine would require an $8,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $47,000 per year. The marginal tax rate is 25%, and the WACC is 9%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. What is the initial investment outlay for the machine for capital budgeting purposes after the 100% bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar.

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