Required: 1. What is the estimated net present value of purchasing the new machine? (Do not round Intermediate calculation. Round your answers to the nearest whole dollar amount.) 2. How much would Steve Bishop's compensation be increased or decreased by the investment? (Negative amounts should be Indicated by a minus sign.)
Required: 1. What is the estimated net present value of purchasing the new machine? (Do not round Intermediate calculation. Round your answers to the nearest whole dollar amount.) 2. How much would Steve Bishop's compensation be increased or decreased by the investment? (Negative amounts should be Indicated by a minus sign.)
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
Related questions
Question
am .102.
![1.
Required information
[The following information applies to the questions displayed below.]
Kate's Candy Corporation makes chewy chocolate candies at a plant in Winston-Salem, North Carolina. Steve Bishop, the
production manager at this facility. installed a packaging machine last year at a cost of $550,000. This machine is
expected to last for 10 more years with no residual value. Operating costs for the projected levels of production, before
depreciation, are $110,000 annually.
2
Steve has just learned of a new packaging machine that would work much more efficiently in the production line. This
machine would cost $638,000 installed, but the annual operating costs would be only $44,000 before depreciation. This
machine would be depreciated over 10 years with no residual value. He could sell the current packaging machine this
year for $275,000.
Required:
1. What is the estimated net present value of purchasing the new machine? (Do not round Intermediate calculation. Round your
answers to the nearest whole dollar amount.)
2. How much would Steve Bishop's compensation be increased or decreased by the investment? (Negative amounts should be
Indicated by a minus sign.)
Steve has worked for Kate's Candy for 7 years. He plans to remain with the firm for about 2 more years, when he expects
to become a vice president of operations at his father-in-law's company. Kate's Candy pays Steve a fixed salary with an
annual bonus of 5% of net income for the year.
Assume that Kate's Candy uses straight-line depreciation and has a 10% required rate of return. Ignore income tax effects.
Answer is complete but not entirely correct.
Net present value of new machine investment
Net effect of investment on Steve Bishop compensation
S
44,088
$ (5.472)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F384fce4d-225b-4928-be29-18cf4a0d1a1d%2F70ead3c6-f441-49bd-9c36-02b6d0906ceb%2Fui0d32_processed.jpeg&w=3840&q=75)
Transcribed Image Text:1.
Required information
[The following information applies to the questions displayed below.]
Kate's Candy Corporation makes chewy chocolate candies at a plant in Winston-Salem, North Carolina. Steve Bishop, the
production manager at this facility. installed a packaging machine last year at a cost of $550,000. This machine is
expected to last for 10 more years with no residual value. Operating costs for the projected levels of production, before
depreciation, are $110,000 annually.
2
Steve has just learned of a new packaging machine that would work much more efficiently in the production line. This
machine would cost $638,000 installed, but the annual operating costs would be only $44,000 before depreciation. This
machine would be depreciated over 10 years with no residual value. He could sell the current packaging machine this
year for $275,000.
Required:
1. What is the estimated net present value of purchasing the new machine? (Do not round Intermediate calculation. Round your
answers to the nearest whole dollar amount.)
2. How much would Steve Bishop's compensation be increased or decreased by the investment? (Negative amounts should be
Indicated by a minus sign.)
Steve has worked for Kate's Candy for 7 years. He plans to remain with the firm for about 2 more years, when he expects
to become a vice president of operations at his father-in-law's company. Kate's Candy pays Steve a fixed salary with an
annual bonus of 5% of net income for the year.
Assume that Kate's Candy uses straight-line depreciation and has a 10% required rate of return. Ignore income tax effects.
Answer is complete but not entirely correct.
Net present value of new machine investment
Net effect of investment on Steve Bishop compensation
S
44,088
$ (5.472)
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