year over the next four years. If the old cutter were to be sold today, the estimates that it would bring in an amount equal to the book value of the equip- ment. The company is considering the purchase of a new, automated plasma cutter that would cost $400,000 to install and that would be depreciated over the next four years toward a $40,000 salvage value using straight-line depreciation. The primary advantage of the new cutter is that it is fully automated and can be run by one opera- tor rather than the three employees currently required. The labor savings would be $100,000 per year. The firm faces a marginal tax rate of 30 percent. company a. What are the differential operating cash flow savings per year during Years 1 through 4 for the new plasma cutter? b. What is the initial cash outlay required to replace the existing plasma cutter with the newer model? c. Sketch a timeline for the replacement project cash flows for Years 0 through 4. d. If the company requires a 15 percent discount rate for new investments, should the plasma cutter be replaced?

year over the next four years. If the old cutter were to be sold today, the estimates that it would bring in an amount equal to the book value of the equip- ment. The company is considering the purchase of a new, automated plasma cutter that would cost $400,000 to install and that would be depreciated over the next four years toward a $40,000 salvage value using straight-line depreciation. The primary advantage of the new cutter is that it is fully automated and can be run by one opera- tor rather than the three employees currently required. The labor savings would be $100,000 per year. The firm faces a marginal tax rate of 30 percent. company a. What are the differential operating cash flow savings per year during Years 1 through 4 for the new plasma cutter? b. What is the initial cash outlay required to replace the existing plasma cutter with the newer model? c. Sketch a timeline for the replacement project cash flows for Years 0 through 4. d. If the company requires a 15 percent discount rate for new investments, should the plasma cutter be replaced?

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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Your company is about to undertake a major investment project. The project will require an initial investment of $200 million in a machine plus another $35 million for working capital. Tax authorities will allow you to depreciate the machine on a straight-line basis over four years to a salvage value of zero. In fact, however, you expect that you can sell the machine for $30 million at the end of Year 4. You will need to have a working capital balance on hand at the end of each year equal to 30% of that year’s sales. The working capital can be fully recovered at the end of the project’s life. You expect that the project will generate $100 million in sales and $40 million in cash operating expenses (excluding depreciation) during each of the next four years. The corporate tax rate is 40%. The discount rate is 7.25%. What is NPV of this project?
Stepwise
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The Baltic Company is considering the purchase of a new machine tool to replace an obsolete one. The machine being used for the operation has a current book value of $80,000, with an annual depreciation expense of $8,000. It has a resale value today of $40,000, is in good working order, and will last, physically, for at least 10 more years. The proposed machine will perform the operation so much more efficiently that Baltic engineers estimate that labor, material, and other direct costs of the operation will be reduced $60,000 a year if it is installed. The proposed machine costs $240,000 delivered and installed, and its economic life is estimated at 10 years, with zero salvage value. The company expects to earn 14 percent on its investment after taxes (14 percent is the firm's cost of capital). The tax rate is 22 percent, and the firm uses straight-line depreciation. Any gain or loss on the sale of the machine at retirement is subject to tax at 40 percent. Would it be better…

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