Shamrock Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years ago at a cost of $129,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $40,300. The new equipment can be bought for $173,980, including installation. Over its 10-year life, it will reduce operating expenses from $192,900 to $147,700 for the first six years, and from $207,800 to $192,200 for the last four years. Net working capital requirements will also increase by $20,000 at the time of replacement. It is estimated that the company can sell the new equipment for $24,100 at the end of its life. Since the new equipment's cash flows are relatively certain, the project's cost of capital is set at 10%, compared with 15% for an average-risk project. The firm's maximum acceptable payback period is 5 years. Click here to view the factor table. (a) Calculate the initial investment amount. Initial investment
Shamrock Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years ago at a cost of $129,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $40,300. The new equipment can be bought for $173,980, including installation. Over its 10-year life, it will reduce operating expenses from $192,900 to $147,700 for the first six years, and from $207,800 to $192,200 for the last four years. Net working capital requirements will also increase by $20,000 at the time of replacement. It is estimated that the company can sell the new equipment for $24,100 at the end of its life. Since the new equipment's cash flows are relatively certain, the project's cost of capital is set at 10%, compared with 15% for an average-risk project. The firm's maximum acceptable payback period is 5 years. Click here to view the factor table. (a) Calculate the initial investment amount. Initial investment
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
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Transcribed Image Text:Shamrock Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years
ago at a cost of $129,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment
is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $40,300.
The new equipment can be bought for $173,980, including installation. Over its 10-year life, it will reduce operating expenses from
$192,900 to $147,700 for the first six years, and from $207,800 to $192,200 for the last four years. Net working capital requirements
will also increase by $20,000 at the time of replacement.
It is estimated that the company can sell the new equipment for $24,100 at the end of its life. Since the new equipment's cash flows
are relatively certain, the project's cost of capital is set at 10%, compared with 15% for an average-risk project. The firm's maximum
acceptable payback period is 5 years.
Click here to view the factor table.
(a)
Calculate the initial investment amount.
Initial investment $
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