X Company currently buys 8,000 units of a component parteach year from a supplier for $8.50 each, but it isconsidering making the part instead. In order to make thepart, X Company will have to buy equipment that will cost$150,000.The equipment will last for six years, at which time it willhave zero disposal value. X Company estimates that it willcost $37,490 a year to make the 8,000 units.What is the approximate rate of return if X Company makesthe part instead of buying it from the supplier?

Step 1:We have to calculate the rate of return (Internal rate of return) of the new equipment.To…

Answered: X Company currently buys 8,000 units of…

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

ChapterA: Appendix - Time Value Of Cash Flows: Compound Interest Concepts And Applications

Section: Chapter Questions

Problem 30P

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Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 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.
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Guthrie Enterprises needs someone to supply it with 142,000 cartons of machine screwsper year to support its manufacturing needs over the next five years. It willcost $1,820,000 to install the equipment necessary to start production; you’ll depreciatethis cost straight-line to zero over the project’s life. You estimate that in five years thisequipment can be salvaged for $152,000. Your fixed production costs will be $267,000 peryear, and your variable production costs should be $9.60 per carton. You also need aninitial investment in net working capital of $132,000. The tax rate is 22 percent and youYear Market Value ($ millions)1 $ 14.702 $11.703 $9.204 $1.95require a return of 12 percent on your investment. Assume that the price per carton is$16.20.b. What is the minimum number of cartons per year that can be supplied and stillguarantee a zero NPV? Verify that the quantity you calculated is enough to atleast have a zero NPV.c. What are the highest fixed costs that could be incurred…
Guthrie Enterprises needs someone to supply it with 142,000 cartons of machine screwsper year to support its manufacturing needs over the next five years. It willcost $1,820,000 to install the equipment necessary to start production; you’ll depreciatethis cost straight-line to zero over the project’s life. You estimate that in five years thisequipment can be salvaged for $152,000. Your fixed production costs will be $267,000 peryear, and your variable production costs should be $9.60 per carton. You also need aninitial investment in net working capital of $132,000. The tax rate is 22 percent and you require a return of 12 percent on your investment. Assume that the price per carton is$16.20.a. Calculate the project NPV.b. What is the minimum number of cartons per year that can be supplied and stillguarantee a zero NPV? Verify that the quantity you calculated is enough to atleast have a zero NPV.c. What is the highest fixed costs that could be incurred and still guarantee a zeroNPV?…
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