Searching for ways to cut costs and increase profit, one of the industrial engineers at Home Comfort FurnitureManufacturers, Inc. determined that the equivalent annual worth of an existing machine over its remaining useful life of 2years is $-71,000 per year. The IE also determined that used machines like the one currently in use are not available anylonger, but the defender can be replaced with a challenger that is more advanced. It will have an AW of $-83,550 if it iskept for 2 years or less, $-75,075 if it is kept between 3 and 4 years, and $-65,000 if it is kept for 5 to 10 years. If thecompany uses a specified 3-year planning horizon and an interest rate of 14% per year.a) Determine when the company should replace the machine.b) Determine the AW for the next 3 years.a) The company should [Keep the machine for 2 years and then replace with the challengerb) The AW for the next 3 years is $

Net Present Value - Calculation used to evaluate the investment and financing decisions that involve…

Answered: Searching for ways to cut costs and…

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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Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $160,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $875,000 per year. The fixed costs associated with this will be $220,000 per year, and variable costs will amount to 24 percent of sales. The equipment necessary for production of the Potato Pet will cost $930,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 23 percent and a required return of 16 percent. a. Calculate the payback period for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. Calculate the NPV for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal…
Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $48,000 and a remaining useful life of four years. It can be sold now for $58,000. Variable manufacturing costs are $48,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is four years. Purchase price Variable manufacturing costs per year (a) Compute the income increase or decrease from replacing the old machine with Machine A. (b) Compute the income increase or decrease from replacing the old machine with Machine B. (c) Should Lopez keep or replace its old machine? (d) If the machine should be replaced, which new machine should Lopez purchase? Req A Complete this question by entering your answers in the tabs below. Req B Req C and D Compute the income increase or decrease from replacing the old machine with Machine B. (Amounts to be deducted should be indicated with a minus…
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Stockton Manufacturing Limited found out that after using only 2 years a machine for semi automation process, a more advanced model is now available in the market. This more advanced model will produce more output with greater efficiency as compare to existing machine. The cost of existing machine is $32,000 with life of 10 years, at the end of which it can be scrapped. The current market value of machine is $15,000 and there is a prospective buyer available to purchase it. The advanced model cost $123,500 with a useful life of 8 years and a scrap value of $20,500 at the end of life. The comparison of the two machines is as follows: EXISTING MACHINE ADVANCED MODEL CAPACITY PER ANNUM 200,000 UNITS 230,000 UNITS SALE PRICE PER UNIT ($) 0.95 0.95 LABOR COST PER UNIT ($) 0.12 0.08 MATERIAL COST PER UNIT ($) 0.48 0.46 FIXED OVERHEADS (ALLOCATION OF PORTION OF COMPANY’S FIXED OVERHEADS) ($) 0.24 0.16 The sales director is of the opinion…
please asnwer correctly: Your company has been approached to bid on a contract to sell 5,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.4 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $395,000 to be returned at the end of the project, and the equipment can be sold for $325,000 at the end of production. Fixed costs are $595,000 per year, and variable costs are $85 per unit. In addition to the contract, you feel your company can sell 12,300, 14,600, 19,200, and 11,600 additional units to companies in other countries over the next four years, respectively, at a price of $180. This price is fixed. The tax rate is 23 percent, and the required return is 10 percent. Additionally, the president of the company…
Waterways is considering the replacement of an antiquated machine that has been slowing down production because of breakdowns and added maintenance. The operations manager estimates that this machine still has 2 more years of possible use. The machine produces an average of 60.00 units per day at a unit cost of $6.80, whereas other similar machines are producing twice that much. The units sell for $9.00. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $71,940 and have a 2-year life. Given the information above, what are the consequences of Waterways replacing the machine that is slowing down production because of breakdowns? Replacing the machine will result in a net loss of $ . Waterways should keep the old i
Crazy Burger Shop has the following investment opportunity: Burger machinery at t=0 costs $6,000. The cost of making burgers is $2,000 per year at t=1, t=2, and t=3. The burger machinery is depreciated using the straight-line method to $1,500 over 3 years. The market value of the burger machinery after three years is $2,600. Estimated annual sales are $4,500 per year at t=1, t=2, and t=3. The required return is 15%. The tax rate is 18%. Assume no working capital requirements. What is the NPV of this project? A. $259.97 B. $1,006.62 C. $876.44 D. $-702.92
Lacey Manufacturing is considering replacing one of its machines. You are provided with the following information: Old Machine: Original purchase price $100,000 Est. annual variable costs 225,000 Est. selling price 25,000 Est. remaining useful life 5 years New Machine: Purchase price $250,000 Est. annual variable costs 150,000 Est. residual value 0 Est. useful life 5 years Determine if the company should keep using the old machine or sell it and replace it with the new machine. Show your work to justify your answer
Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $180,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $895,000 per year. The fixed costs associated with this will be $228,000 per year, and variable costs will amount to 24 percent of sales. The equipment necessary for production of the Potato Pet will cost $970,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 22 percent and a required return of 16 percent. Calculate the Time 0 cash flow for this project. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. Calculate the annual OCF for this project. Note: Do not round…
Lukow Products is investigating the purchase of a piece of automated equipment that will save $130,000 each year in direct labor and inventory carrying costs. This equipment costs $780,000 and is expected to have a 6-year useful life with no salvage value. The company's required rate of return is 10% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using table. Required: 1. What is the net present value of the piece of equipment before considering its intangible benefits? Note: Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount. 2. What minimum dollar value per year must be provided by the equipment's intangible benefits to justify the $780,000 investment? Note: Do not round…
Salty Nuts, Inc. must buy a new nut-shelling machine. The industrial engineer has collected the following information concerning the apparent best alternative. Calculate the net future worth of the alternative if the MARR is 6%.

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