You are evaluating two different machines.- Machine A costs $1,000,000, has a three-year lifewith expectedsalvage value in three years of $448,000, and haspre-tax operatingcosts of $150,000 per year.- Machine B costs $1,200,000, has a five-year lifewith expectedsalvage value in five years of $344,064, and has pre-tax operatingcosts of $200,000 per year.- Both machines are in Class 8 (CCA rate of 20percent per year).- If your tax rate is 40 percent and your discount rateis 10 percent,compute the EAC (equivalent annual cost) for bothmachines.Which do you prefer?

To determine which machine is more cost-effective, we calculated the Equivalent Annual Cost (EAC)…

Answered: You are evaluating two different…

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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Use the following base case information to evaluate the project: PT Kolam Makara has a project costs $900,000, has a five-year life, and has a salvage value of $130,000. Depreciation is straight-line to zero. The required return is 14% and tax rate is 34%. Sales are projected at 2350 units per year. Price per unit is $400. Variable cost per unit is $200 and fixed costs are $150,000 per year. It is known that the depreciation expense is $180,000 per year. The engineering department estimates you will need an initial net working capital investment of $50,000. Suppose you think that the unit sales, price, variable cost, and fixed cost projections given are accurate to within 7%.1. What are the upper and lower bounds for these projections?2. What is the base-case NPV?3. What are the best- and worst- case scenario NPVs?
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Bha
A firm is considering two different methods of solving a production problem. Both methods are expected to be obsolete in six years. Method A would cost $80,000 initially and have annual operating costs of $22,000. Method B would cost $52.000 initially and have annual operating costs of $17,000. The salvage value realized with Method A would be $20,000 and Method B would be $15,000. Method A would generate $16,000 of revenue a year more than Method B. Investments in both methods depreciate as a five-year MACRS property class. The firm's marginal income-tax rate is 40%. The firm's MARR is 20%. What would be the required additional annual revenue for Method A so the firm would be indifferent in its choice of method?
3
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