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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Jax Inc is considering the purchase of a new machine for the production of computers. Machine A costs $7,000,000 and will last for six years. Variable costs are 25% of sales, and fixed costs are $500,000 annually. Machine B costs $10,000,000 and will last for ten years. Variable costs for the machine are 15% of sales, and fixed costs are $750,000 annually. The sales for each machine will be $4,000,000 per year. The required rate of return is 9%, the tax rate is 21%, and both machines will be depreciated using straight-line depreciation with no salvage value. Calculate the equivalent annual annuity for Machine B. (Round to 2 decimals) What is the Net Present Value for Machine B? (round to 2 decimals)
Glow Limited is considering expanding its production capacity with the installation of newequipment that will cost $950 000. This equipment is expected to have a useful life of 8 years,when it will be disposed of at a scrap value of $25 000.Import duties on the equipment would amount to 2% of purchase price. Installation and testingcosts would be $15 000. To support the expanded capacity, net working capital would have to beincreased by $29 000. The new equipment would result in annual net operating cash inflows of$300 000.Glow Limited’s cost of capital is 16% and the tax rate is 25%.A. Compute initial, annual and terminal after-tax cash flows. B. Use the NPV method to advise Happy Limited on the effect that installing the new equipment will have on the value of the firm.
We assume that the company that you selected is considering a new project. The project has 8 years’ life. This project requires an initial investment of $580 million to purchase equipment, and $30 million for shipping & installation fees. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 10% of the purchase price (including the shipping & installation fee). The number of units of the new product expected to be sold in the first year is 2,660,000 and the expected annual growth rate is 10.5%. The sales price is $280 per unit and the variable cost is $225 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 3.0%. The required net operating working capital (NOWC) is 11.8% of sales with the corporate tax rate of 21%. The project is assumed to have the same risk as the corporation, so 5.35% is the discount rate for this hypothetical project. Estimate annual cash flows for the 8…
JDAR Enterprises needs someone to supply it with 156000 cartons of machine screws per year to support its manufacturing needs over the next 4years, and you've decided to bid on the contract. It will cost you $1750000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that in five years this equipment can be salvaged for $220000. Your fixed production costs will be $281,000 per year, and your variable production costs should be $9 per carton. You also need an initial investment in net working capital of $146,000. If your tax rate is 0.32 percent and you require a return of 0.16 percent on your investment, what bid price per carton should you submit What is the initial investment 1896000 what is the terminal value? (hint, discounted) 163257.76 what is the discounted cash flow 4564795.86 what is the bid price 4.73 Finish review A
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
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We assume that the company that you selected is considering a new project. The project has 8 years' life. This project requires an initial investment of $580 million to purchase equipment, and $30 million for shipping & installation fees. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 10% of the purchase price (including the shipping & installation fee). The number of units of the new product expected to be sold in the first year is 2,660,000 and the expected annual growth rate is 10.5%. The sales price is $280 per unit and the variable cost is $225 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 3.0%. The required net operating working capital (NOWC) is 11.8% of sales with the corporate tax rate of 21%. The project is assumed to have the same risk as the corporation, so 5.35% is the discount rate for this hypothetical project. Estimate annual cash flows for the 8 years.…
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…
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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
Tanaka Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $429,000 is estimated to result in $161,000 in annual pretax cost savings. The press falls in the MACRS five- year class (MACRS schedule) and it will have a salvage value at the end of the project of $62,000. The press also requires an initial investment in spare parts inventory of $16,700. along with an additional $3,700 in inventory for each succeeding year of the project. The shop's tax rate is 22 percent and its discount rate is 9 percent. Calculate the project's NPV.

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