2. The Kish Corporation is considering the purchase of a new commercial oven. The original cost of thecompany's existing oven was $250,000. The machine is now 10 years old and has a current marketvalue of $50,000. The old oven is being depreciated over a 15-year useful life to a zero estimatedsalvage value on a straight-line basis. Management is contemplating the purchase of a new oventhat costs $375,000 with an estimated salvage value of $25,000. Expected cash savings from thenew oven are $45,000 a year (before tax), and the oven will require the company to increaseworking capital by $15,000. Depreciation is on a straight-line basis over a 5-year life, and the cost ofcapital is 9.50%. Assume a 21% tax rate.a. What is the net present value of the new machine?Should the replacement be made?b.

Market value of old machine=$50000Cost of new machine=$375000Life of new machine=5 yearsAnnual…

Answered: The Kish Corporation is considering the…

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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Ned Tech Corporation is considering replacing one of its machines with a more efficient one. The old machine has a book value of $60,000 and a remaining useful life of 5 years. It can sell the old machine now for $ 265,000. The old machine is being depreciated by 120,000 per year straight line. The new machine has a purchase price of $ 1,175,000, an estimated useful life, five years of MACRS class life, and a salvage value of $145,000. Annual economic savings is $255,000 if the new machine is installed. Taxes are 21%, and WACC is 12. The depreciation Table for MACS is on page 176, Table 3. a. Calculate the NPV and IRR of the project and decide whether to accept or reject the project and why? b. What is the importance of cash flow to a company.
The Do-All Engineering Corporation bought a 72-inch vertical boring machine 10 years ago for P90,000 with an expected life of 20 years. The management anticipates now that the machine will serve well for another 6 years and proposes to purchase a new machine costing P120,000 with an expected life of 16 years. The old machine is depreciated as anticipated by straight-line formula and can be sold now for P60,000. The operating costof the old machine is P1,000 and for the new machine P500 per annum. The salvage value of both machines is 10% of its value regardless of the length of time they are used. If money is worth 10% to the company, should the old machine be replaced?
Urmilaben
A manufacturing company is considering acquiring a new injection-molding machine ata cost of $150,000. Because of a rapid change inproduct mix, the need for this particular machine isexpected to last only eight years, after which timethe machine is expected to have a salvage value of$10,000. The annual operating cost is estimatedto be $11,000. The addition of the machine to thecurrent production facility is expected to generatean annual revenue of $48,000. The firm has only$100,000 available from its equity funds, so it mustborrow the additional $50,000 required at an interest rate of 10% per year with repayment of principal and interest in eight equal annual amounts. Theapplicable marginal income tax rate for the firm is40%. Assume that the asset qualifies for a sevenyear MACRS property class.(a) Determine the after-tax cash flows.(b) Determine the NPW of this project atMARR = 14%.
Aurora is considering the purchase of a new machine. Its invoice price is $250,000, freight charges are estimated to be $9,000, and installation costs are expected to be $6,000. Salvage value of the new machine is expected to be zero after a useful life of 4 years. Existing equipment could be retained and used for an additional 4 years if the new machine is not purchased. At that time, the salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine would be scrapped. Aurora’s accountant, has accumulated the following data regarding annual sales and expenses with and without the new machine. Without the new machine, Aurora can sell 12,000 units of product annually at a per unit selling price of $80. If the new unit is purchased, the number of units produced and sold would increase by 25%, and the selling price would remain the same. The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old…
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An injection moulding machine was purchased 2 years ago. The machine has been depreciated on a straight-line basis with $500 salvage value, and it has 6 years of remaining life. Its current book value is $2,600, and it can be sold for $3,000 at this time. Assume, for ease of calculation, that the annual depreciation expense is $350 per year. The firm 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. This machine falls into the MACRS 5-year class (20%, 32%, 19%, 12%, 12%, 5%). The replacement machine would permit an output expansion, so sales would rise by $1,000 per year; even so, the new machine would cause operating expenses to decline by $1,500 per year. The machine would require that inventories be increased by $2,000 but accounts payable would simultaneously increase by $500. The firm’s marginal federal-plus-state tax rate is 40 percent, and its cost of capital is 15 percent. Should it replace…
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A manufacturing company is considering investing in a new machine that costs $50,000. The machine is expected to have a useful life of 5 years. The company estimates that the salvage value of the machine at the end of its useful life will be $10,000. If the company uses straight-line depreciation, what will be the capitalized cost of the machine? A) $7,000 B) $7,500 C) $8,000 D) $8,500
Using the information in the following table , what is the depreciation expense per year created by the project? Dunaway Industries is evaluating the idea of expanding their production facility in Cobb County The CFO gathered the following data. Dunaway Industries spent $ 500,000 researching other sites for their expansion. The equipment needed for the expansion will cost $ 25,600,000 fully installed . The equipment will be depreciated over 20 years to a salvage value of $ 1,000,000 . Dunaway Industries uses straight -line depreciation . If Dunaway accepts the project , the company will sell the equipment for salvage value ( i.e.$ 1,000,000 ) at the end of the life of the project . If Dunaway Industries adds the new equipment , sales are expected to increase by 17,400,000 and costs are expected to increase by $ 10,000,000 . The appropriate tax rate for Dunaway Industries is 30% The capital of the firm includes 70% of equity and 30% of debt . Dunaway Industries recently issued a bond…
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Which values am I supposed to use for the depreciation?

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