The Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next 8 years. Machine A hasan after-tax cost of $9.9 million but will provide after-tax inflows of $4.2 million per year for 4 years. If Machine A were replaced, its after-tax cost would be $11.8 million due toinflation and its after-tax cash inflows would increase to $4.5 million due to production efficiencies, Machine B has an after-tax cost of $13.1 million and will provide after-tax inflowsof $3.6 million per year for 8 years. If the WACC is 7%, which machine should be acquired? Explain. Enter your answers in millions. For example, an answer of $10,550,000 shouldbe entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.Machine -Select- is the better project and will increase the company's value by $millions, rather than the smillions created by Machine -Select-.

Machine A:Initial investment = $9.9 million Cashflow for first 4 years = $4.2 million Investment @…

Answered: The Lesseig Company has an opportunity…

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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A corporation is considering purchasing a machine that will save $150,000 per year before taxes. The cost of operating the machine (including maintenance) is $30,000 per year. The machine will be needed for five years, after which it will have a zero salvage value. MACRS depreciation will be used, assuming a three-year class life. The marginal income tax rate is 25%. If the firm wants 15% return on investment after taxes, how much can it afford to pay for this machine? Click the icon to view the MACRS depreciation schedules Click the icon to view the interest factors for discrete compounding when /- 15% per year. If the firm wants 15% return on investment after taxes, it can afford to pay thousand for this machine. (Round to one decimal place.)
Ilana Industries Incorporated needs a new lathe. It can buy a new high-speed lathe for $2.0 million. The lathe will cost $31,000 per year to run, but it will save the firm $184,000 in labor costs and will be useful for 10 years. Suppose that, for tax purposes, the lathe is entitled to 100% bonus depreciation. At the end of the 10 years, the lathe can be sold for $470,000. The discount rate is 10%, and the corporate tax rate is 21%. What is the NPV of buying the new lathe? Note: A negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places. NPV
J.B. Enterprises is considering the purchase of new equipment with a cost of $1,000,000. If the equipment is purchased, the incremental net cash flows are expected to be $300,000 per year for five years. These net cash flows already reflect the of the equipment and the company’s 40% tax rate. However, there are liability risks associated with the use of this product. The board of directors estimates a “cost of worry” of $25,000 per year. Calculate the net present value of this project incorporating the cost of worry if the company’s cost of capital is 10%. a. $42,466 b. $340,909 c. $375,000 d. $61,420
Sun Brite has a new pair of sunglasses it is evaluating. The company expects to sell 5, 700 pairs of sunglasses at a price of $ 152 each and a variable cost of $104 each. The equipment necessary for the project will cost $300,000 and will be depreciated on a straight-line basis over the 9-year life of the project. Fixed costs are $180,000 per year and the tax rate is 21 percent. How sensitive is the operating cash flow to a $1 increase in variable costs per pairs of sunglasses? Multiple Choice -$4,117 -S3, 335 -$4, 503 S3, 705 $3,335
although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $120,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,200 per year. It would have zero salvage value at the end of its life. The project cost of capital is 12%, and its marginal tax rate is 25%. Should Chen buy the new machine? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.
Ilana Industries Incorporated needs a new lathe. It can buy a new high-speed lathe for $1 million. The lathe will cost $35,000 per year to run, but it will save the firm $125,000 in labor costs and will be useful for 10 years. Suppose that, for tax purposes, the lathe is entitled to 100% bonus depreciation. At the end of the 10 years, the lathe can be sold for $100,000. The discount rate is 8%, and the corporate tax rate is 21%. What is the NPV of buying the new lathe? Note: A negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.
Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $100,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,400 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign. NPV: $
The Oviedo Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has a book value and a market value of zero. However, the machine is in good working order and will last at least another 10 years. The proposed replacement machine will perform the operation so much more efficiently that Oviedo's engineers estimate that it will produce after-tax cash flows (labor savings) of $6,000 per year. The after-tax cost of the new machine is $30,000, and its economic life is estimated to be 10 years. It has zero salvage value. The firm's WACC is 10%, and its marginal tax rate is 25%. Should Oviedo buy the new machine? Oviedo (should or Should not) purchase the new machine.
Daily Enterprises is purchasing a $10.4 million machine. It will cost $46,000 to transport and install the machine. The machine has a depreciable life of five years using straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.4 million per year along with incremental costs of $1.5 million per year. Daily's marginal tax rate is 21%. You are forecasting incremental free cash flows for Daily Enterprises. What are the incremental free cash flows associated with the new machine? The free cash flow for year 0 will be $10,446,000. (Round to the nearest dollar.) The free cash flow for years 1-5 will be $ (Round to the nearest dollar.)
Laurel’s Lawn Care Ltd., has a new mower line that can generate revenues of $135,000 per year. Direct production costs are $45,000, and the fixed costs of maintaining the lawn mower factory are $17,500 a year. The factory originally cost $0.90 million and is being depreciated for tax purposes over 20 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 25%.
Owens Mills Corp. is considering producing two mutually exclusive machine types. Machine A requires an up-front expenditure at t = 0 of $450,000, it has an expected life of 2 years, and it will generate positive after-tax cash flows of $350,000 per year (all cash flows are realized at the end of the year) for 2 years. At the end of 2 years, the machine will have zero salvage value, but every two years the company can purchase a replacement machine with the same cost and identical cash inflows.Alternatively, it can choose Machine B, which requires an expenditure of $1 million at t = 0, has an expected life of 4 years, and will generate positive after-tax cash flows of $360,000 per year (all cash flows are realized at year end). At the end of 4 years, Machine B will also have an after-tax salvage value of $190,000. The cost of capital is 10%. Which machine should the Owens Mills choose? Show your EAA (equivalent annual annuity) Excel calculations to support your choice on Machine A vs.…
Daily Enterprises is purchasing a $10.3 million machine. It will cost $46,000 to transport and install the machine. The machine has a depreciable life of five years using straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.2 million per year along with incremental costs of $1.1 million per year. Daily’s marginal tax rate is 35%. You are forecasting incremental free cash flows for Daily Enterprises. What are the incremental free cash flows associated with the new machine? A. The free cash flow for year 0 will be? (Round to nearest dollar.) B. The free cash flow for years 1-5 will be? (Round to the nearest dollar.)

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