Taylor Toy Corp Ch 11 (11-9) Taylor Toy Corp. is considering the replacement of it injection molding machine. It is 2 years old but new technology has it considering the newest model. The old (current) machine was acquired 2 years ago and is being depreciated on a straight line basis over 8 years (6 years remaining).The annual depreciation expense is $350 per year, and its current book value is $2,100. It can be sold for $2,500 today. If the machine is not replaced, it is expected to be sold for $500 at the end of its remaining life (6 yrs). The new, replacement machine will cost $8,000. It is expected to be used for 6 years, and is expected to be sold for $800 then. It will be depreciated using MACRS (5-year class with 2 year convention). The new machine is expected to support an increase in sales by $1,000 per year, and with its improved electrical efficiency, it should reduce operating expenses by $1,500 per year. Inventories will need to increase by $2,000 and Account payable will increase by $500. The company's tax rate is 40%. Taylor Toy's Cost of Capital is 15%, which is the appropriate Hurdle Rate for this project. Using a blank workbook (not a template.), evaluate this project: а. Present the cash flows b. Calculate the evaluation measures. с. Should Taylor Toy Corp replace the machine?

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
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**FIN 6020 v20f**

**Taylor Toy Corp Ch 11 (11-9)**

Taylor Toy Corp. is considering the replacement of its injection molding machine. It is 2 years old but new technology has it considering the newest model.

- The old (current) machine was acquired 2 years ago and is being depreciated on a straight line basis over 8 years (6 years remaining). The annual depreciation expense is $350 per year, and its current book value is $2,100. It can be sold for $2,500 today. If the machine is not replaced, it is expected to be sold for $500 at the end of its remaining life (6 years).

- The new, replacement machine will cost $8,000. It is expected to be used for 6 years, and is expected to be sold for $800 then. It will be depreciated using MACRS (5-year class with ½ year convention).

- The new machine is expected to support an increase in sales by $1,000 per year, and with its improved electrical efficiency, it should reduce operating expenses by $1,500 per year.

- Inventories will need to increase by $2,000 and Account payable will increase by $500.

- The company’s tax rate is 40%.

- Taylor Toy’s Cost of Capital is 15%, which is the appropriate Hurdle Rate for this project.

Using a blank workbook (not a template …), evaluate this project:

a. Present the cash flows  
b. Calculate the evaluation measures.  
c. Should Taylor Toy Corp replace the machine?
Transcribed Image Text:**FIN 6020 v20f** **Taylor Toy Corp Ch 11 (11-9)** Taylor Toy Corp. is considering the replacement of its injection molding machine. It is 2 years old but new technology has it considering the newest model. - The old (current) machine was acquired 2 years ago and is being depreciated on a straight line basis over 8 years (6 years remaining). The annual depreciation expense is $350 per year, and its current book value is $2,100. It can be sold for $2,500 today. If the machine is not replaced, it is expected to be sold for $500 at the end of its remaining life (6 years). - The new, replacement machine will cost $8,000. It is expected to be used for 6 years, and is expected to be sold for $800 then. It will be depreciated using MACRS (5-year class with ½ year convention). - The new machine is expected to support an increase in sales by $1,000 per year, and with its improved electrical efficiency, it should reduce operating expenses by $1,500 per year. - Inventories will need to increase by $2,000 and Account payable will increase by $500. - The company’s tax rate is 40%. - Taylor Toy’s Cost of Capital is 15%, which is the appropriate Hurdle Rate for this project. Using a blank workbook (not a template …), evaluate this project: a. Present the cash flows b. Calculate the evaluation measures. c. Should Taylor Toy Corp replace the machine?
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