Fundamentals Of Financial Management
14th Edition
ISBN: 9781305629080
Author: Eugene F. Brigham, Joel F. Houston
Publisher: South-western College Pub (edition 14)
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Chapter 12, Problem 16P
REPLACEMENT CHAIN The Fernandez Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next eight years. Machine A costs $10 million but will provide after-tax inflows of $4 million per year for 4 years. If Machine A were replaced, its cost would be $12 million due to inflation and its
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The Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product
the company will need for the next 8 years. Machine A has an after-tax cost of $8.6 million but will provide after-tax
inflows of $4 million per year for 4 years. If Machine A were replaced, its after-tax cost would be $10.2 million due to
inflation and its after-tax cash inflows would increase to $4.5 million due to production efficiencies. Machine B has an after-
tax cost of $13.6 million and will provide after-tax inflows of $4.3 million per year for 8 years. If the WACC is 5%, which
machine should be acquired? Explain. Enter your answers in millions. For example, an answer of $10,550,000 should be
entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.
Machine B
than the $
is the better project and will increase the company's value by $
millions created by Machine A
millions, rather
The Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next 8 years. Machine A has
an after-tax cost of $9.7 million but will provide after-tax inflows of $5 million per year for 4 years. If Machine A were replaced, its after-tax cost would be $11.6 million due to
inflation and its after-tax cash inflows would increase to $5.1 million due to production efficiences. Machine B has an after-tax cost of $14.4 million and will provide after-tax inflows
of $3.8 million per year for 8 years. If the WACC is 13%, which machine should be acquired? Explain. Enter your answers in millions. For example, an answer of $10,550,000 should
be entered as 10:55. Do not round intermediate calculations. Round your answers to two decimal places
Machine
is the better project and will increase the company's value by s
millions, rather than the s
millions created by Machine
B
1-7
am
The Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next 8 years. Machine A has
an after-tax cost of $9.9 million but will provide after-tax inflows of $4.2 million per year for 4 years. If Machine A were replaced, its after-tax cost would be $11.8 million due to
inflation and its after-tax cash inflows would increase to $4.5 million due to production efficiencies, Machine B has an after-tax cost of $13.1 million and will provide after-tax inflows
of $3.6 million per year for 8 years. If the WACC is 7%, which machine should be acquired? Explain. Enter your answers in millions. For example, an answer of $10,550,000 should
be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.
Machine -Select- is the better project and will increase the company's value by $
millions, rather than the s
millions created by Machine -Select-.
Chapter 12 Solutions
Fundamentals Of Financial Management
Ch. 12 - Operating cash flows rather than accounting income...Ch. 12 - Explain why sunk costs should not be included in a...Ch. 12 - Explain why net operating working capital is...Ch. 12 - Why are interest charges not deducted when a...Ch. 12 - Prob. 5QCh. 12 - What are some differences in the analysis for a...Ch. 12 - Distinguish among beta (or market) risk,...Ch. 12 - Prob. 8QCh. 12 - Prob. 9QCh. 12 - If you were the CFO of a company that had to...
Ch. 12 - What is a "replacement chain"? When and how should...Ch. 12 - What is an "equivalent annual annuity (EAA)"? When...Ch. 12 - Suppose a firm is considering two mutually...Ch. 12 - REQUIRED INVESTMENT Truman Industries is...Ch. 12 - PROJECT CASH FLOW Eisenhower Communications is...Ch. 12 - AFTER-TAX SALVAGE VALUE Kennedy Air Services is...Ch. 12 - REPLACEMENT ANALYSIS The Chang Company is...Ch. 12 - EQUIVALENT ANNUAL ANNUITY Corcoran Consulting is...Ch. 12 - DEPRECIATION METHODS Kristin is evaluating a...Ch. 12 - SCENARIO ANALYSIS Huang Industries is considering...Ch. 12 - NEW PROJECT ANALYSIS You must evaluate the...Ch. 12 - NEW PROJECT ANALYSIS You must evaluate a proposal...Ch. 12 - REPLACEMENT ANALYSIS The Dauten Toy Corporation...Ch. 12 - REPLACEMENT ANALYSIS Mississippi River Shipyards...Ch. 12 - PROJECT RISK ANALYSIS The Butler-Perkins Company...Ch. 12 - UNEQUAL LIVES Haleys Graphic Designs Inc. is...Ch. 12 - UNEQUAL LIVES Cotner Clothes Inc. is considering...Ch. 12 - REPLACEMENT CHAIN Zappe Airlines is considering...Ch. 12 - REPLACEMENT CHAIN The Fernandez Company has an...Ch. 12 - EQUIVALENT ANNUAL ANNUITY A firm has two mutually...Ch. 12 - Prob. 18PCh. 12 - NEW PROJECT ANALYSIS Holmes Manufacturing is...Ch. 12 - REPLACEMENT ANALYSIS The Erley Equipment Company...Ch. 12 - REPLACEMENT ANALYSIS The Bigbee Bottling Company...
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- Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?arrow_forwardGina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?arrow_forwardThe Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?arrow_forward
- 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.arrow_forwardTalbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. What is the initial investment outlay?arrow_forwardTalbot Industries is considering launching a new product. The new manufacturing equipment will cost 17 million, and production and sales will require an initial 5 million investment in net operating working capital. The companys tax rate is 40%. a. What is the initial investment outlay? b. The company spent and expensed 150,000 on research related to the new product last year. Would this change your answer? Explain. c. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for 1.5 million after taxes and real estate commissions. How would this affect your answer?arrow_forward
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