Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base priceis $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would berequired at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. Themachine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine inplace for 2 years. At the end of the second year, the machine will be sold for $100,000. Riverview has a cost ofcapital of 12% and a marginal tax rate of 34%.What is the NPV of the project?-$9.783$3,875O$9,555$12,155$19,016

NPV means Net present value.It is a capital budgeting technique used for making investment…

Answered: Riverview Company is evaluating the…

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

See similar textbooks

Similar questions

Nguyen Inc. is considering the purchase of a new computer system (ICX) for $140,000. The system will require an additional $20,000 for installation. If the new computer is purchased it will replace an old system that has been fully depreciated. The new system will be depreciated over a period of 8 years using straight-line depreciation. If the ICX is purchased, the old system will be sold for $20,000. The ICX system, which has a useful life of 8 years, is expected to increase revenues by $31,000 per year over its useful life. Operating costs are expected to decrease by $3,000 per year over the life of the system. The firm is taxed at a 40 percent marginal rate. Round your answers to the nearest dollar. A. what investment is required to acquire the ICX system and replace the old system? B. compute the annual net cash flows associated with the purchase of the ICX system.
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $66,000. The machine would replace an old piece of equipment that costs $17,000 per year to operate. The new machine would cost $8,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $29,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.)
The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $108,000, and it would cost another $12, 500 to modify it for special use by your firm. The machine will be sold after three years for $65,000. The applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. The machine would require an increase in net operating working capital (inventory) of $5,500. The machine would have no effect on revenues, but is expected to save the firm $44,000 per year in before tax operating costs, mainly labor. Campbell’s marginal tax rate is 35 percent. What is the Net Investment (NINV)
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…
Cirice Corporation is considering opening a branch in another state. The operating cash flow will be $ 150, 400 a year. The project will require new equipment costing $592, 000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $ 177,000 at the end of the project. The project requires an initial investment of $41,000 in net working capital, which will be recovered at the end of the project. The tax rate is 23 percent. What is the project's IRR? Multiple Choice 12.33% 17.06% 15.99% 15.67% 14.74%
Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $40,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3. What is the initial investment used for calculating the machine's simple rate of return? 4. What is the simple rate of return on the new bottling machine? Note: Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3% 1. Depreciation expense 2. Incremental net operating income 3. Initial investment 4. Simple rate of return $ $ 12,000 80,000
Holmes Manufacturing is considering a new machine that costs $290,000 and would reduce pretax manufacturing costs by $90,000 annually. The new machine will be fully depreciated at the time of purchase. Management thinks the machine would have a value of $24,000 at the end of its 5-year operating life. Net operating working capital would increase by $28,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes's marginal tax rate is 25%, and a 13% WACC is appropriate for the project. a. Calculate the project's NPV. Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest cent. $ Calculate the project's IRR. Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the project's MIRR. Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the project's payback. Do not round intermediate calculations. Round…
America Inc., is considering the addition of a new maintenance services division. Opening the division will require a new building, staff, and equipment. The proposed plan involves purchasing land that is currently selling for $750,000. The price of constructing the building on this land is $4.5 million and should be finished before operations begin in year 1. The building will be depreciated straight-line to a book value of $500,000 over 20 years. New equipment will cost $200,000 upfront, and will be depreciated straight line to zero over 4 years. An HR team will need to be brought on for hiring new staff. They estimate that the upfront cost of hiring will be $210,000. In addition, a sales forecast has already been formed for the project and the incurred fee for this service is $90,000. The team forecasts sales of $900,000, $800,000, $600,000, and $300,000 for years 1 through 4 respectively. In each year, inventory equal to one tenth of the current year’s revenue will be required.…
You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $120,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $24,000. The equipment would require a $12,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $64,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. a. What is the initial investment outlay for the spectrometer after 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. $ b. 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: $ c. If the WACC is 11%, should…
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: $
You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $190,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $57,000. The equipment would require a $14,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $24,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar.$ 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…
The Baltic Company is considering the purchase of a new machine tool to replace an obsolete one. The machine being used for the operation has a current book value of $80,000, with an annual depreciation expense of $8,000. It has a resale value today of $40,000, is in good working order, and will last, physically, for at least 10 more years. The proposed machine will perform the operation so much more efficiently that Baltic engineers estimate that labor, material, and other direct costs of the operation will be reduced $60,000 a year if it is installed. The proposed machine costs $240,000 delivered and installed, and its economic life is estimated at 10 years, with zero salvage value. The company expects to earn 14 percent on its investment after taxes (14 percent is the firm's cost of capital). The tax rate is 22 percent, and the firm uses straight-line depreciation. Any gain or loss on the sale of the machine at retirement is subject to tax at 40 percent. Would it be better…

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS