Valentina Allegra de Fontaine Inc. is considering the purchase of a new machine for use in its production process. The invoice cost of the machine is Php2,000,000 and needs an additional Php700,000 to install. This machine is expected to substantially reduce costs in the following items: Labor costs Php700,000 Materials costs 120,000 However, maintenance costs are expected to jump by Php6,000 per month if the machine is acquired. The machine would also be overhauled at the end of the third year that would cost Php150,000. Its useful life is 5 years, after which it would be sold for its residual value of Php180,000. The old machine can be sold for Php70,000. Valentina Allegra de Fontaine Inc. requires a return of at least 14% on investment. Required: a. Compute the net annual cash inflow from the new machine. b. Compute the net present value of the proposed investment. Assume an income tax rate of 40%, determine the net present value of the proposed investment. C.

Valentina Allegra de Fontaine Inc. is considering the purchase of a new machine for use in its production process. The invoice cost of the machine is Php2,000,000 and needs an additional Php700,000 to install. This machine is expected to substantially reduce costs in the following items: Labor costs Php700,000 Materials costs 120,000 However, maintenance costs are expected to jump by Php6,000 per month if the machine is acquired. The machine would also be overhauled at the end of the third year that would cost Php150,000. Its useful life is 5 years, after which it would be sold for its residual value of Php180,000. The old machine can be sold for Php70,000. Valentina Allegra de Fontaine Inc. requires a return of at least 14% on investment. Required: a. Compute the net annual cash inflow from the new machine. b. Compute the net present value of the proposed investment. Assume an income tax rate of 40%, determine the net present value of the proposed investment. C.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

See similar textbooks

Similar questions

At Stardust Gems, a faux gem and jewelry company, the setting department is a bottleneck. The company is considering hiring an extra worker, whose salary will be $67,000 per year, to ease the problem. Using the extra worker, the company will be able to produce and sell 9,000 more units per year. The selling price per unit is $20. The cost per unit currently is $15.85 as shown: What is the annual financial impact of hiring the extra worker for the bottleneck process?
Flanders Manufacturing is considering purchasing a new machine that will reduce variable costs per part produced by $0.15. The machine will increase fixed costs by $18,250 per year. The information they will use to consider these changes is shown here.
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.
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?
Micro Tek Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 4,000 units at $450 per unit. The equipment has a cost of $3,950,000, residual value of $50,000, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor $20 Direct materials 205 Factory overhead (including depreciation) 39 Total cost per unit $264 Determine the average rate of return on the equipment. Round your answer to one decimal place.fill in the blank 1 %
Stirling Windows Inc. of Hong Kong is considering purchasing an automated cutting machine for use in the production of its stained-glass windows. The machine would cost $800,000. (All currency amounts are in Hong Kong dollars.) An additional $550,000 would be required for installation costs and for software. Management believes that the automated machine would provide substantial annual reductions in costs, as shown below: Annual Reductionin Costs Labour costs $ 140,000 Material costs $ 96,000 The new machine would require considerable maintenance work to keep it in proper adjustment. The company’s engineers estimate that maintenance costs would increase by $5,000 per month if the machine were purchased. In addition, the machine would require a $81,000 overhaul at the end of the fifth year. The new cutting machine would be usable for ten years, after which it would be sold for its scrap value of $300,000. It would replace an old…
Oahu Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 4,500 units at $246 per unit. The equipment has a cost of $418,500, residual value of $31,500, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Line Item Description Amount Cost per unit: Direct labor $41.00 Direct materials 161.00 Factory overhead (including depreciation) 28.00 Total cost per unit $230.00 Determine the average rate of return on the equipment. If required, round to the nearest whole percent.fill in the blank 1 of 1 %
In order to increase production capacity, Global Industries is considering replacement an existing production machine with a new technologically improved machine effective January 1. The following information is being considered by Global Industries: • The new machine would purchased for P160,000 in cash. Shipping, installation, and testing would cost additional P30,000 • The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 per unit. Incremental operating costs include P30 per unit in variable costs and total fixed costs of P40,000 per year. • The investment in the new machine will require an immediate increase in working capital of P35,000. This cash outflow will be recovered at the end of year 5 • Global uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of 5 years and zero salvage value Global is subject to a 40% corporate income tax rate Global uses the net present…
In order to increase production capacity, Global Industries is considering replacement an existing production machine with a new technologically improved machine effective January 1. The following information is being considered by Global Industries: • The new machine would purchased for P160,000 in cash. Shipping, installation, and testing would cost additional P30,000 • The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 per unit. Incremental operating costs include P30 per unit in variable costs and total fixed costs of P40,000 per year. The investment in the new machine will require an immediate increase in working capital of P35,000. This cash outflow will be recovered at the end of year 5 • Global uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of 5 years and zero salvage value • Global is subject to a 40% corporate income tax rate Global uses the net present…
Oahu Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 5,100 units at $276 per unit. The equipment has a cost of $521,700, residual value of $39,300, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Line Item Description Amount Cost per unit: Direct labor $47.00 Direct materials 182.00 Factory overhead (including depreciation) 31.60 Total cost per unit $260.60 Determine the average rate of return on the equipment. If required, round to the nearest whole percent.
In order to increase production capacity, Global Industries is considering replacement an existing production machine with a new technologically improved machine effective January 1. The following information is being considered by Global Industries: The new machine would purchased for P160,000 in cash. Shipping, installation, and testing would cost additional P30,000 • The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 per unit. Incremental operating costs include P30 per unit in variable costs and total fixed costs of P40,000 per year. The investment in the new machine will require an immediate increase in working capital of P35,000. This cash outflow will be recovered at the end of year 5 • Global uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of 5 years and zero salvage value • Global is subject to a 40% corporate income tax rate Global uses the net present…
Hana Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 4,300 units at $275 per unit. The equipment has a cost of $399,900, residual value of $30,100, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor $47.00 Direct materials 184.00 Factory overhead (including depreciation) 32.50 Total cost per unit $263.50 Determine the average rate of return on the equipment. If required, round to the nearest whole percent. %