Xtra Mechanical, Inc. is a manufacturer of machine parts with locations in the United States. It is considering entering i agreement with a customer where it will supply certain parts to the customer for their products. The project will require Xtra so 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 saver. 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 net working capital is required. We assume that all the money tied up in the net working 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 revesues. In addition to cost of goods sold, the project will also require additional operating costs of 70% of revenues per year The company's average tax rate is 23% and the marginal cate is 29%. Gives the risk level of this project Xira requires a rate of retum 1% above it weighted cost of capital. Its weighted cost of capital is 10% aformation Available in the Question (Please calculate COGS, Annual Additional Operating Costs, and Depreciation. You will use these numbers) PERIOD Levenues OGS Annual Additional Operating Costs Depreciation MACKS Depreciation Rates eight year apply Cash Flow Table PERIOD $ 3,000,000 $4,000,000 $ 5.000.000 $ 5.500,000 s 6/000,000 $5,500/000 20.4% 2 32.0% 3 19.0% 12.0 12.00% 50% 7 7 8 3,500,000
Xtra Mechanical, Inc. is a manufacturer of machine parts with locations in the United States. It is considering entering i agreement with a customer where it will supply certain parts to the customer for their products. The project will require Xtra so 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 saver. 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 net working capital is required. We assume that all the money tied up in the net working 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 revesues. In addition to cost of goods sold, the project will also require additional operating costs of 70% of revenues per year The company's average tax rate is 23% and the marginal cate is 29%. Gives the risk level of this project Xira requires a rate of retum 1% above it weighted cost of capital. Its weighted cost of capital is 10% aformation Available in the Question (Please calculate COGS, Annual Additional Operating Costs, and Depreciation. You will use these numbers) PERIOD Levenues OGS Annual Additional Operating Costs Depreciation MACKS Depreciation Rates eight year apply Cash Flow Table PERIOD $ 3,000,000 $4,000,000 $ 5.000.000 $ 5.500,000 s 6/000,000 $5,500/000 20.4% 2 32.0% 3 19.0% 12.0 12.00% 50% 7 7 8 3,500,000
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
Related questions
Question
Transcribed Image Text: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 will also require additional operating costs of 70% of revenues per year
The company's average tax rate is 23% and the marginal rate is 25%. Given the risk level of this project Xtra requires a rate of return 1% above its
weighted cost of capital. Its weighted cost of capital is 10%
Information Available in the Question (Please calculate COGS, Annual Additional Operating Costs, and Depreciation. You will use these numbers)
PERIOD
0
2
4
Revenues
COGS
Annual Additional Operating Costs
Depreciation
MACRS Depreciation Rates
Cash Flow Table
OCF
PERIOD
Less: Net Capital Spending
Less: Change in Net Working Capital
Add: After-tax Salvage of Machine in year
Add: Recovery from Net Working Capital Account is your
Cash Flow From Assens (CFFA)
NPV
IRR
Accept or Reject the Project?
Answer
$3,000,000 $
20.0%
4,000,000 $ 5,000,000 $
32.0%
19.0%
5.500,000 $
12.0%
S
6,000,000 $
12.0%
6
7
5,500,000 $ 4,500,000 1
50%
8
3,500,000
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