The president of Orlando Corporation has asked you to evaluate the proposed acquisition of new kitchen equipment for its five restaurants. The equipment's price is $1,200,000 with shipping and installation costs of $300,000. The equipment will be depreciated to a zero-salvage value over 10 years on a straight- line basis. Purchase of the equipment would require an increase in net operating working capital of $75,000. The equipment would increase the firm's before-tax revenues by $500,000 per year but would also increase operating costs by $200,000 per year. The machine is expected to be used for 15 years and then sold for $100,000. The firm's marginal tax rate is 20%, and the project's cost of capital is 18%. Should the new machine be purchased? Show computations

The president of Orlando Corporation has asked you to evaluate the proposed acquisition of new kitchen equipment for its five restaurants. The equipment's price is $1,200,000 with shipping and installation costs of $300,000. The equipment will be depreciated to a zero-salvage value over 10 years on a straight- line basis. Purchase of the equipment would require an increase in net operating working capital of $75,000. The equipment would increase the firm's before-tax revenues by $500,000 per year but would also increase operating costs by $200,000 per year. The machine is expected to be used for 15 years and then sold for $100,000. The firm's marginal tax rate is 20%, and the project's cost of capital is 18%. Should the new machine be purchased? Show computations

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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This alternative involves purchasing new aquaculture equipment for $500,000, with a forecasted useful life of 10 years, to replace old equipment that could be disposed of at an estimated salvage value of $60,000. If GBEI acquires the new equipment, it could take on a bigger service area that was not previously feasible, thus leading to an annual increase in sales of $200,000. With the improvements in technology built into the equipment, GBEI’s annual operating expenses would be reduced by $100,000. Operation of the new equipment would require GBEI to maintain inventory levels $100,000 higher than usual over the life of the project. The new equipment could be sold at the end of its useful life for $40,000. Assume straight line depreciation. Assume gross margin on incremental revenues is 60%. The cost of capital for this investment is 11.65%. 1. Calculate the NPV, Payback Period, and Profitability Index of the purchase of the new aquaculture equipment.
You are evaluating the proposed acquisition of a new machine costing $50,000, and it falls into the MACRS 3-year class. Purchase of the machine would require an increase of net operating working capital of $2,000, which will be recovered when the machine is sold. The machine would increase the firm's revenues by $27,000 per year and its operating costs by $16,000 per year. The machine is expected to be used only for 3 years and then be sold for $25,000. The firm's marginal tax rate is 27 percent, and the project's cost of capital is 14 percent. What is the non-operating terminal cash flows at year 3? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively. Question 13 options: $20,145 $20,455 $20,725 $20,975 $21,195 $21,505
The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $108,000, and it would cost another $12, 500 to modify it for special use by your firm. The machine will be sold after three years for $65,000. The applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. The machine would require an increase in net operating working capital (inventory) of $5,500. The machine would have no effect on revenues, but is expected to save the firm $44,000 per year in before tax operating costs, mainly labor. Campbell’s marginal tax rate is 35 percent. What is the Net Investment (NINV)
You are evaluating a proposed acquisition of a new machine costing $50,000. While the machine is expected to last for 5 years, it falls into the MACRS 3-year class. Purchase of the machine would require an increase of net operating working capital of $2,000. The machine would increase the firm's revenue by $19,000 per year and its operating costs by $10,000 per year. The firm's marginal tax rate is 25 percent, and the project's cost of capital is 14 percent. What is the operating cash flow in Year 4? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively.
Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $27.00 million. The plant and equipment will be depreciated over 10 years to a book value of $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.43 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.30 million per year and cost $2.46 million per year over the 10-year life of the project. Marketing estimates 13.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 33.00%. The WACC is 12.00%. Find the IRR (internal rate of return).
Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 5 years. At the end of the fifth year, the machine will be sold for $20,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the IRR of the project? 14.1% O 31.3% 9.5% O 28.2% O 19.7%
You are evaluating the proposed acquisition of a new machine costing $57,000, and it falls into the MACRS 3-year class. Purchase of the machine would require an increase of net operating working capital of $4,000, which will be recovered when the machine is sold. The machine would increase the firm's revenues by $30,000 per year and its operating costs by $17,000 per year. The machine is expected to be used only for 3 years and then be sold for $25,000. The firm's marginal tax rate is 27 percent, and the project's cost of capital is 14 percent. What is the non-operating terminal cash flows at year 3? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively. Question 13 options: $22,267 $22,587 $22,907 $23,097 $23,327 $23,607

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