Starling Co. is considering disposing of a machine with a book value of$25,000 and estimated remaining life of five years. The old machinecan be sold for $5,400. A new high-speed machine can be purchasedat a cost of 65,500. It will have a useful life of five years and noresidual value. It is estimated that the annual variable manufacturingcosts will be reduced from $22,900 to $20,100 if the new machine ispurchased. The five-year differential effect on profit from replacing themachine is a(n)a. increase of $59,930b. decrease of $59,930c. decrease of $46,100d. increase of $46,100

Calculate the differential effect on income as follows: Differential effect = - Cost of new asset +…

Answered: Starling Co. is considering disposing…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $46,000 and a remaining useful life of five years. It can be sold now for $56,000. Variable manufacturing costs are $43,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Purchase price Variable manufacturing costs per year Machine A $ 123,000 19,000 Machine B $136,000 15,000 (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? Complete this question by entering your answers in the tabs below. Req A Req B Req C and D Compute the income increase or decrease from replacing the old machine with Machine B. Note:…
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The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent line. The equipment necessary would cost $1.83 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 10 percent of its initial cost. The company believes that it can sell 29,000 tents per year at a price of $75 and variable costs of $34 per tent. The fixed costs will be $505,000 per year. The project will require an initial investment in net working capital of $237,000 that will be recovered at the end of the project. The required rate of return is 11.8 percent and the tax rate is 21 percent. What is the NPV?
Geary Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $576,036 is estimated to result in $255,756 in annual pretax cost savings. The press falls in the MACRS five-year class (Refer to the MACRS table on page 277), and it will have a salvage value at the end of the project of $106,549. The press also requires an initial investment in spare parts inventory of $73,540, along with an additional $7,848 in inventory for each succeeding year of the project. If the shop's tax rate is 0.26 and its discount rate is 0.09, what is the total cash flow in year 4? (Do not round your intermediate calculations.) (Make sure you enter the number with the appropriate +/- sign)
BRAC is considering investing $100000 in a new machine with an expected life of 5 years. The machine will have no scrap value at the end of the 5 years. It is expected that 20000 units will be sold each year at a selling prices of $6.00 per unit. Variable production costs are expected to $2.30 per unit, while incremental fixed costs, mainly the wages of a maintenance engineer, are expected to be $10000 per years. BRAC uses a discount rate of 11% for investment appraisal purposes and expects investment projects to recover their initial investment within two years. Required: (1) Explain why risk and uncertainty should be considered in the investment appraisal process. (2) Calculate and comment on the payback period of the project. (3) Evaluate the sensitivity of the projects net present value to a change in the following project variables: sales volume sales price variable cost and discuss the…
Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $46,000 and a remaining useful life of five years. It can be sold now for $56,000. Variable manufacturing costs are $44,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Machine A Machine B Purchase price $ 116,000 $ 129,000 Variable manufacturing costs per year 21,000 13,000 (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?
Yoyo, Inc. is considering the purchase of a new machine that will reduce manufacturing costs by P15,000 annually. Yoyo will use MACRS to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for P10,000. The firm expects to be able to reduce net operating working capital by P15,000 when the machine is installed, but required operating working will reduce to its original level when the machine is sold after 5 years. Yoyo's tax rate is 30% and it uses 12% cost of capital. The applicable depreciation rates are 20%, 19%, 12%, 11%, and 6%. If the machine costs P60,000, a. What is the project's NPV b. What is the project's MIRR
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Janko Wellspring Incorporated has a pump with a book value of $26,000 and a four-year remaining life. A new, more efficient pump is available at a cost of $47,000. Janko can receive $8,200 for trading in the old pump. The old machine has variable manufacturing costs of $27,000 per year. The new pump will reduce variable costs by $11,100 per year over its four-year life. Should the pump be replaced? Multiple Choice No, because the company will be $5,600 worse off in total. Yes, because income will increase by $5.500 per year No, because income wit decrease by $100 per year. Yes, because income will increase by $5.600 in total No, Janko will record a loss of $16,400 r they replace the pump
Bridgeport Industries is considering the purchase of new equipment costing $1,280,000 to replace existing equipment that will be sold for $194,000. The new equipment is expected to have a $220,000 salvage value at the end of its 5-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 32,800 units annually at a sales price of $29 per unit. Those units will have a variable cost of $15 per unit. The company will also incur an additional $86,000 in annual fixed costs. Identify the amount and timing of all cash flows related to the acquisition of the new equipment. (Enter negative amounts using a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Cash Flow Timing Amount Purchase of new equipment $4 Salvage of old equipment Sales revenue Variable costs Additional fixed costs Salvage of new equipment >
The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent line. The equipment necessary would cost $1.25 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 15 percent of its initial cost. The company believes that it can sell 22,500 tents per year at a price of $62 and variable costs of $23 per tent. The fixed costs will be $375,000 per year. The project will require an initial investment in net working capital of $185,000 that will be recovered at the end of the project. The required rate of return is 10.5 percent and the tax rate is 40 percent. What is the NPV?

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