West River Company is considering purchasing a machine (Class 8, CCA rate 20%) that will cost $1,000,000. The machine would replace an existing machine. The advantage of the new machine is it wht reduce the variable cost per unit of the product produced on these machines from $15 toS12.501 This product is sold under contract and the annual production and sales is 130,000 units. The contract's remaining life is five years, at which time the existing machine would be sold for $5.000 and the new machine, if it is purchased now, would be sold for $100,000. In either case, there would be assets remaining in this class. If the existing machine is sold now, the net realizable value would be $50,000. West River Company faces a tax rate of 32% on incremental income and requires an after-tax return of 12% on this investment. The plant accountant advises that because of the improved efficiency of the new machine, average inventory levels in the plant will be reduced by $15,000 during the life of the project. What is the net present value of the proposed investment in the new machine?

West River Company is considering purchasing a machine (Class 8, CCA rate 20%) that will cost $1,000,000. The machine would replace an existing machine. The advantage of the new machine is it wht reduce the variable cost per unit of the product produced on these machines from $15 toS12.501 This product is sold under contract and the annual production and sales is 130,000 units. The contract's remaining life is five years, at which time the existing machine would be sold for $5.000 and the new machine, if it is purchased now, would be sold for $100,000. In either case, there would be assets remaining in this class. If the existing machine is sold now, the net realizable value would be $50,000. West River Company faces a tax rate of 32% on incremental income and requires an after-tax return of 12% on this investment. The plant accountant advises that because of the improved efficiency of the new machine, average inventory levels in the plant will be reduced by $15,000 during the life of the project. What is the net present value of the proposed investment in the new machine?

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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Janko Wellspring Incorporated has a pump with a book value of $26,000 and a four-year remaining life. A new, more efficient pump is available at a cost of $47,000. Janko can receive $8,200 for trading in the old pump. The old machine has variable manufacturing costs of $27,000 per year. The new pump will reduce variable costs by $11,100 per year over its four-year life. Should the pump be replaced? Multiple Choice No, because the company will be $5,600 worse off in total. Yes, because income will increase by $5.500 per year No, because income wit decrease by $100 per year. Yes, because income will increase by $5.600 in total No, Janko will record a loss of $16,400 r they replace the pump
Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $491,000 cost with an expected four-year life and a $20,000 salvage value. Additional annual information for this new product line follows. (PV of $1. EV of $1. PVA of $1, and EVA of $1) (Use appropriate factor(s) from the tables provided.) Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Machinery Selling, general, and administrative expenses Required: 1. Determine income and net cash flow for each year of this machine's life. 2. Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. 3. Compute net present value for this machine using a discount rate of 7%. $ 1,990,000 1,509,000 117,750 162,000 Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Compute net present value…
Bridgeport Industries is considering the purchase of new equipment costing $1,280,000 to replace existing equipment that will be sold for $194,000. The new equipment is expected to have a $220,000 salvage value at the end of its 5-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 32,800 units annually at a sales price of $29 per unit. Those units will have a variable cost of $15 per unit. The company will also incur an additional $86,000 in annual fixed costs. Identify the amount and timing of all cash flows related to the acquisition of the new equipment. (Enter negative amounts using a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Cash Flow Timing Amount Purchase of new equipment $4 Salvage of old equipment Sales revenue Variable costs Additional fixed costs Salvage of new equipment >
Tanaka Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $395,000 is estimated to result in $151,000 in annual pretax cost savings. The press falls in the 5-year MACRS class, and it will have a salvage value at the end of the project of $51,000. The press also requires an initial investment in spare parts inventory of $22,000, along with an additional $3,200 in inventory for each succeeding year of the project. The shop’s tax rate is 22 percent and its discount rate is 9 percent. (MACRS schedule) Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $49,000 and a remaining useful life of five years. It can be sold now for $59,000. Variable manufacturing costs are $44,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Machine A Machine B Purchase price $ 122,000 $ 136,000 Variable manufacturing costs per year 18,000 15,000 (a) Compute the income increase or decrease from replacing the old machine with Machine A. (b) Compute the income increase or decrease from replacing the old machine with Machine B. (c) Should Lopez keep or replace its old machine? (d) If the machine should be replaced, which new machine should Lopez purchase?
DSSS CorporationDSSS Corporation is considering a new project to manufacture widgets. The cost of the manufacturing equipment is $135,000. The cost of shipping and installation is an additional $2,600. The asset will fall into the 3-year MACRS class. The year 1- 4 MACRS percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. Sales are expected to be $215,000 per year. Cost of goods sold will be 64% of sales. The project will require an increase in net working capital of $2,600. At the end of three years, DSSS plans on ending the project and selling the manufacturing equipment for $30,000. The marginal tax rate is 36% and DSSS Corporation’s appropriate discount rate is 12%. The fixed expenses is $12,000.Refer to DSSS Corporation. What is the after-tax cash flow from selling the machine at the end of year 3? Group of answer choices $21,935 $30,000 $8,065 $2,600
Cori's Meats is looking at a new sausage system with an installed cost of$304,000. This cost will be depreciated straight-line to zero over the project's five-year life, at theend of which the sausage system can be scrapped for $30,000. The sausage system will save the firm$116,000 per year in pretax operating costs and the system requires an initial investment in net workingcapital of $15,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the NPV ofthis project? Security F has an expected return of 11 percent and a standarddeviation of 47 percent per year. Security G has an expected return of 14 percent and a standarddeviation of 63 percent per year.a. What is the expected return on a portfolio composed of 65 percent of Security F and 35 percent ofSecurity G?b. If the correlation between the returns of Security F and Security G is. 15, what is the standarddeviation of the portfolio described in part (a)? One potential criticism of the internal rate of…
Xtra Mechanical, Inc. is a manufacturer of machine parts with locations in the United States. It is considering entering into an eight year supply agreement with a customer where it will supply certain parts to the customer for their products. The project will require Xtra to purchase a new machine at the begining of the project and the cost of the machine is $8,500,000. At the end of the project, the machine is expected to be sold in the used market for 20% of the original cost before paying taver. The five year MACRS depreciation will be used for tax purposes. The depreciate rates are shown below. There is an initial networking capital investment of $15,000 and no further investment in not working capital is required. We assume that all the money tied up in the networking capital account will be recovered by the end of the project Revenues from the contract per year are shown below. Cost of goods sold is expected to be 50% of revenues. In addition to cost of goods seld, the project…
Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $902,400 is estimated to result in $300,800 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $131,600. The press also requires an initial investment in spare parts inventory of $37,600, along with an additional $5,640 in inventory for each succeeding year of the project. If the shop's tax rate is 21 percent and its discount rate is 16 percent, what is the NPV for this project? Multiple Choice $-69,008.14 $-65,686.09 $-153,856.79 $-72,458.55 $-65,557.74
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $920,000, and it would cost another $23,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $642,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $371,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. a. What is the Year-0 net cash flow? $ b. What are the net operating cash flows in Years 1, 2, and 3? Year 1:$ Year 2:$ Year 3:$ c. What is the additional Year-3 cash flow (i.e, the…
Tanaka Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $420,000 is estimated to result in $166,000 in annual pretax cost savings. The press falls in the 5-year MACRS class, and it will have a salvage value at the end of the project of $66,000. The press also requires an initial investment in spare parts inventory of $27,000, along with an additional $3,450 in inventory for each succeeding year of the project. The shop's tax rate is 22 percent and its discount rate is 9 percent. (MACRS schedule) Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Should the company buy and install the machine press? O Yes O No 4
DSSS CorporationDSSS Corporation is considering a new project to manufacture widgets. The cost of the manufacturing equipment is $135,000. The cost of shipping and installation is an additional $2,600. The asset will fall into the 3-year MACRS class. The year 1- 4 MACRS percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. Sales are expected to be $215,000 per year. Cost of goods sold will be 64% of sales. The project will require an increase in net working capital of $2,600. At the end of three years, DSSS plans on ending the project and selling the manufacturing equipment for $30,000. The marginal tax rate is 36% and DSSS Corporation’s appropriate discount rate is 12%. The fixed expenses is $12,000.Refer to DSSS Corporation. What is the depreciation expense in year 2? Group of answer choices $10,196 $20,379 $61,163 $45,862

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