Van Nuys Company is considering the purchase of a new machine which will cost $7,370. The machine will provide revenues of $4,000 per year. The cash operating costs will be $2,000 per year. The new machine will have a useful life of six years. The company's cost of capital is 12 percent. Ignore income taxes. Should the company buy the new machine? Yes, because NPV3D0 and IRR0 and IRR>Cost of Capital No, because NPV>0 and IRR0 and IRR>Cost of Capital Yes, because NPV = IRR

Van Nuys Company is considering the purchase of a new machine which will cost $7,370. The machine will provide revenues of $4,000 per year. The cash operating costs will be $2,000 per year. The new machine will have a useful life of six years. The company's cost of capital is 12 percent. Ignore income taxes. Should the company buy the new machine? Yes, because NPV3D0 and IRR0 and IRR>Cost of Capital No, because NPV>0 and IRR0 and IRR>Cost of Capital Yes, because NPV = IRR

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

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? If the firm wants 15% return on investment after taxes, it can afford to pay ?.
The Adderley Corporation is considering investing in a new machine that has an estimated life of three years. The cost of the machine (in 5 millions) is $500 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The machine will result in sales of 300 million widgets in year 1 with future sales estimated to grow by 10% per year. The price per widget that Adderley will charge its customers is $19 and is to remain constant over the three years. The widgets have a cost per unit to manufacture of $7 each. Installing the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the company will need to hold 3% of its annual revenues in cash, 4% of its annual revenues in accounts receivable, 13% of its annual revenues in inventory, but will also benefit from trade financing (ie, accounts payable) equal to 6% of its annual revenues. The firm is in the 28%…
Gluon Incorporated is considering the purchase of a new high pressure glueball. It can purchase the glueball for $40,000 and sell its old low-pressure glueball, which is fully depreciated, for $6,000. The new equipment has a 10-year useful life and will save $10,000 a year in expenses before tax. The opportunity cost of capital is 12%, and the firm's tax rate is 21%. What is the equivalent annual saving from the purchase if Gluon can depreciate 100% of the investment immediately. Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
| Frontier Corp. is considering a new product that would require an after-tax investment of $1,400,000 at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $650,000 at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $100,000 per year. There is a 70% probability that the market will be good. Tsai Corp. could delay the project for a year while it conducted a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows are the same whether the project is delayed or not; however, the timing of the cash flows would change. (There would be the same number of cash flows-only the cash flows would be extended out one extra year.) The project's WACC is 10%. What is the value of the project after considering the investment timing option? a. $108,226.89 b. $137,743.32 c. $167,259.75 d. $196,776.18 e. $216,453.79
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.)
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 29 percent, and the project's cost of capital is 14 percent. What is the operating cash flow in Year 2? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively. Question 11 options: $11,675 $11,885 $12,095 $12,425 $12,585 $12,915
Dog Up! Franks is looking at a new sausage system with an installed cost of $520,000. The system qualifies for 100 percent bonus depreciation, and at the end of the project in 5 years the sausage system can be scrapped for $78,000. The sausage system will save the firm $200,000 per year in pretax operating costs and the system requires an initial investment in net working capital of $37,000. If the tax rate is 23 percent and the discount rate is 8 percent, what is the NPV of this project? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. NPV
Ben is looking at a new computer system with an installed cost of $560000. This cost will be depreciated straight - line to zero over the project's five year life, at the end of which the computer system can be scrapped for $85000. The computer system will save the company $165000 per year in pretax operatiing costs, and the system requires an initial investment in net working capital of $ 29000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project?
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 $15,000 per year and its operating costs by $7,000 per year. The firm's marginal tax rate is 30 percent, and the project's cost of capital is 14 percent. What is the operating cash flow in Year 1? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively. Question 11 options: $10,550 $10,720 $10,940 $11,180 $11,370 $11,670
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.
Genesis Corporation want to purchase a piece of machinery for $150,000 that will cost $20,000 to have it delivered and installed. Based on past information, they believe they can sell the machinery for $25,000 in 5 years. The company’s marginal tax rate is 34%. If the applicable CCA rate is 20% and the required return on this project is 15%, what is the present value of the CCA tax shield?
You are contemplating the replacement of an old printing machine with a new model costing $63,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and the current book value of $14,000 versus the current market value of $21,000. The firm's corporate tax rate is 24 percent. If the company sells the old machine at the market value, what is the initial after-tax cash outlay for the new printing machine purchase?