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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Question
The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $400 for years. Its current book value is $2.400, and it can be sold on an Internet auction site for 54,500 at this time. Thus, the annual depreciation expense is $2.400/6=5400 per year. If the old steamer is not replaced, it can be sold for $800 at the end of its useful ife. Gilbert is considering purchasing the Side Steamer 3000, 3 higher-end steamer, which costs §8,200, and has an estimated useful Iife of 6 years with an estimated salvage value of $800. This steamer falls into the MACRS 5-years class, 50 the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year: the new machine's much greater efficiency would reduce operating expenses by §1,500 per year. To support the greater sales, the new machine would require that inventories increase by $2.900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 40%, and the project cost of capitalis 14%. What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
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