Required informationNuclear safety devices installed several years ago have been depreciated from a firstcost of $200,000 to zero using the Modified Accelerated Cost Recovery System(MACRS). The devices can be sold on the used equipment market for an estimated$15,000, or they can be retained in service for 5 more years with a $9000 upgrade nowand an operating expenses (OE) of $6000 per year. The upgrade investment will bedepreciated over 3 years with no salvage value. The challenger is a replacement withnewer technology at a first cost of $40,000, n = 5 years, and S= 0. The new units willhave operating expenses of $7000 per year.Use a 5-year study period, an effective tax rate of 41%, an after-tax minimum acceptable rate of return(MARR) of 18% per year, and an assumption of classical straight line depreciation (no half-year convention)to perform an after-tax AW-based replacement study.The annual worth of the defender is determined to be $|The annual worth of the challenger is determined to be $Since the annual worth of the defenderis smaller, it is retained.

To determine the annual worth of each of the options, we need to build a timeline for each option…

Answered: The annual worth of the defender is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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Austins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high-tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled in order to complete this recommendation: According to the information, the project will last 10 years and require an initial investment of $800,000, depreciated with straight-line over the life of the project until the final value is zero. The firms tax rate is 30% and the required rate of return is 12%. You believe that the variable cost and sales volume may be as much as 10% higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board, Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation(s).
Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
Rework the given problem, assuming the following additional information:• The machine is classified as a seven-year MACRS recovery period. Thetax rate is 40%. and the after-tax MARR is 10%.
To improve package tracking at a UPS transfer facility, conveyor equipment was upgraded with RFID sensors at a cost of S300 and has a useful life of 3 years. The operating cost is expected to be $150 per year. The salvage value of the equipment is expected to be $140 for the first 2 years, but duc to obsolescence, it won't have a significant value after that. At an interest rate of 10% per year, determine (a) The economic service life of the equipment and associated annual worth (i (b) The percentage increase in the AW of cost if the equipment is retained I years longer than the ESL
Please answer
The Balas Manufacturing Company is considering buying an overhead pulley system. The new system has a purchase price of $150.000, an estimated useful life and MACRS class life of five years, and an estimated salvage value of $l0,000. The system is expected to enable the company 10 economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective products made. A total annual savings of $95,000 will be realized if the new pulley system is installed. 1l1e company is in the 35% marginal tax bracket. 111e initial investment will be financed with 40% equity and 60% debt. The before-tax debt interest rate. which combines both short-term and long-term financing. is 12% with the loan to be repaid in equal annual installments over the project life.(a) Determine the after-tax cash flows.(b) Evaluate this investment project by using a MARR of 20%.(c) Evaluate this investment project on the basis of the !RR criterion.
Commodity Copper is considering the installation of a $1,764,000 production conveyor system that would generate the following labor cost savings over its 10-year life: Years Annual Labor Cost Savings 1–2 $280,000 3–5 340,000 6–8 288,800 9–10 260,000 a. The system will have no salvage at the end of its 10-year life, and the company uses a discount rate of 12 percent. What is the pre-tax net present value of this potential investment?Note: Round your final answer to the nearest whole dollar.

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The annual worth of the defender is determined to be $ The annual worth of the challenger is determined to be $ [ Since the annual worth of the defender is smaller, it is retained.