Two investments involving a virtual mold apparatus for producing dental crowns qualify for different property classes. Investment Ahas a cost of $51,300, lasts 9 years with no salvage value, and costs $150,000 per year in operating expenses. It is in the 3-yearproperty class. Investment B has a cost of $76,500.00, lasts 9 years with no salvage value, and costs $125,000 per year. InvestmentB, however, is in the 7-year property class. The company marginal tax rate is 25%, and MARR is an after-tax 10%.a. Based upon the use of MACRS-GDS depreciation, compare the AW of each alternative.AWA = $AWB = $Which should be selected? (Investment A; Investment B)b. What must be Investment B's cost of operating expenses for these two investments to be equivalent? $Round your answer to 2 decimal places. The tolerance is + 10.

Operating expenses:Operating expenses encompass various elements such as salaries, rent, utilities,…

Answered: Two investments involving a virtual…

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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Bridgton Golf Academy is evaluating different golf practice equipment. The "Dimple-Max* equipment costs $104,000, has a three-year life, and costs $8,600 per year to operate. The relevant discount rate is 10%. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to $0. Furthermore, assume the equipment has a salvage value of $20,000 at the end of the project's life. The relevant tax rate is 28%. All cash flows occur at the end of the year. What is the equivalent annual cost (EAC) of this equipment?
The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight-line basis over its 10-year economic life to an estimated salvage value of $10,000. If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent. a. $15,000 b. $27,000 c. $21,000 d. $18,000
A proposed cost-saving device has an installed cost of $765,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $67,000, the tax rate is 21 percent, and the project discount rate is 9 percent. The device has an estimated Year 5 salvage value of $103,000. What level of pretax cost savings do we require for this project to be profitable? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Pretax cost savings
A proposed cost-saving device has an installed cost of $825,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $91,000, the tax rate is 23 percent, and the project discount rate is 9 percent. The device has an estimated Year 5 salvage value of $139,000. What level of pretax cost savings do we require for this project to be profitable? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Pretax cost savings
Sheep Ranch Golf Academy is evaluating new golf practice equipment. The "Dimple- Max" equipment costs $110,000, has a 4-year life, and costs $9,100 per year to operate. The relevant discount rate is 12 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $8,300 at the end of the project's life. The relevant tax rate is 24 percent. All cash flows occur at the end of the year. What is the equivalent annual cost (EAC) of this equipment? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) EAC
RR must build a tunnel to maintain his access around the mountain. The tunnel could be fabricated of normal steel for an initial cost of $45,000 and should last for 18 years. Maintenance will cost $1,000 per year. Another option would be to use corrosion resistant steel, which will last for 18 years, with annual maintenance cost of $100. In 18 years there would be no salvage value for either bridge. RR pays combined federal and state taxes at the 48% marginal rate and uses straight-line depreciation. If the after tax MARR is 10%, what is the maximum amount that should be spent on the corrosion-resistant tunnel? Enter your answer as follow: 123456.78
Two stamping machines are under consideration for purchase by a metal recycling company. The manual model will cost P1,250,000 to buy with an eight-year life and a P250,000 salvage value. Its annual operating costs will be P800,000. A computer-controlled model will cost P4,750,000 to buy and it will have a twelve-year life if upgraded at the end of year six for 750,000. Its terminal salvage value will be P1,150,000, with annual operating costs of P375,500 for labor and P125,000 for maintenance. The company's minimum attractive rate of return is 18%.Show the Cash Flow Diagram?
A construction company is considering the proposed acquisition of a newearthmover. The purchase price is $100,000, and an additional $25,000 is required to modify the equipment for special use by the company. The equipment falls into the MACRS five-year classification (tax life). and it will be sold after five year. (project life) for $50,000. Purchase of the earthmover will have no effect on revenues. but it is expected 10 save the firm $60,000 per year in before-tax operating costs-mainly labor.The firm's marginal tax rate is 40%. Assume that the initial investment is to be financed. by a bank loan at an intrest rate of 10% payable annually. Determine that after-tax cash flow and the worth of investment for this project if the firm's MARR is known to be 12°o.
BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage value. This old machine now has a book value of $2,000, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $7,000 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a six-year period with no salvage value. Click here to view the factor table. (a) Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.) Cash payback period (b) Determine the approximate internal rate of return. (Round answer to O decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal rate of return (c) years The investment Assuming the company has a required rate of return of 10%, determine whether the new machine…
A construction company is considering acquiring a new earthmover. The purchase price is $105,000, and an additional $28,000 is required to modify the equipment for special use by the company. The equipment falls into the MACRS seven-year classification (the tax life), and it will be sold after five years (the project life) for $55,000. The purchase of the earthmover will have no effect on revenues, but the machine is expected to save the firm $70,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21%. Assume that the initial investment is to be financed by a bank loan at an interest rate of 6% payable annually. Determine the after-tax cash flows by using the generalized cash flow approach and the worth of the investment for this project if the firm's MARR is known to be 11%.
Freida Company is considering an asset replacement project ofreplacing a control device. This old control device has been fullydepreciated but can be sold for $5,000. The new control device, whichis more automated, will cost $42,000. The new device’s installation andshipping costs will total $16,000. The new device will be depreciatedon a straight-line basis over its 2-year economic life to an estimatedsalvage value of $0. The actual salvage value of this device at the endof 2-year period (That is, the market value of the device at the end of2-year period) is estimated to be $4,000. If the replacement project is accepted, Freida will require an initial working capital investment of$2,200 (that is, adding $2,200 initially to its net working capital).During the 1st year of operations, Freida expects its annual revenue toincrease from $72,800 to $90,000. After the 1st year, revenues fromthe replacement are expected to increase at a rate of $2,800 a year forthe remainder of the project…
Tucker Enterprise Inc. is considering a project that requires a numerically controlled (NC) machine for $28,000 (year 0) and plans to use it for five years, after which time it will be scrapped. The allowed depreciation deduction during the first year is $4,000 because the equipment falls into the seven-year MACRS property category. (The first-year depreciation rate is 14.29%.) The cost of the goods produced by this NC machine should include a charge for the depreciation of the machine. Suppose the company estimates the following revenues and expenses, including the depreciation for the first operating year:• Gross income = $50,000• Cost of goods sold = $20,000• Depreciation on the NC machine= $4,000• Operating expenses = $6,000Without the project, the company's taxable income from regular business operations amounts to $20 million, which places the company in the highest tax bracket of 35%. Compute the net income from the project during the first year.

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