Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 12, Problem 17P
The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $10 million but realizes after-tax inflows of $4 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $15 million and realizes after-tax inflows of $3.5 million per year for 8 years, after which it must be replaced. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. The cost of capital is 10%. By how much would the value of the company increase if it accepted the better machine? What is the equivalent annual
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The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for
the foreseeable future. Machine A costs $10 million but realizes after-tax inflows of $4 million per year for 4 years. After 4 years, the
machine must be replaced. Machine B costs $15 million and realizes after-tax inflows of $3.5 million per year for 8 years, after which it
must be replaced. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in
the machines. The cost of capital is 10%.
A. By how much would the value of the company increase if it accepted the better machine?
B. What is the equivalent annual annuity for each machine?
The Jackson Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $14 million but realizes after-tax inflows of $6 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $17 million and realizes after-tax inflows of $4.5 million per year for 8 years, after which it must be replaced. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. If the cost of capital is 9 percent, which machine should the company use?
a. Machine A
b. Machine B
c. Both machines A and B
d. Neither machine A or B
Owens Mills Corp. is considering producing two mutually exclusive machine types. Machine A requires an up-front expenditure at t = 0 of $450,000, it has an expected life of 2 years, and it will generate positive after-tax cash flows of $350,000 per year (all cash flows are realized at the end of the year) for 2 years. At the end of 2 years, the machine will have zero salvage value, but every two years the company can purchase a replacement machine with the same cost and identical cash inflows.Alternatively, it can choose Machine B, which requires an expenditure of $1 million at t = 0, has an expected life of 4 years, and will generate positive after-tax cash flows of $360,000 per year (all cash flows are realized at year end). At the end of 4 years, Machine B will also have an after-tax salvage value of $190,000. The cost of capital is 10%. Which machine should the Owens Mills choose? Show your EAA (equivalent annual annuity) Excel calculations to support your choice on Machine A vs.…
Chapter 12 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 12 - What types of projects require the least detailed...Ch. 12 - Prob. 3QCh. 12 - Prob. 4QCh. 12 - Prob. 5QCh. 12 - A project has an initial cost of 40,000, expected...Ch. 12 - IRR Refer to Problem 12-1. What is the projects...Ch. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6P
Ch. 12 - Your division is considering two investment...Ch. 12 - Edelman Engineering is considering including two...Ch. 12 - Prob. 9PCh. 12 - Project S has a cost of $10,000 and is expected to...Ch. 12 - Prob. 11PCh. 12 - After discovering a new gold vein in the Colorado...Ch. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - The Pinkerton Publishing Company is considering...Ch. 12 - Shao Airlines is considering the purchase of two...Ch. 12 - The Perez Company has the opportunity to invest in...Ch. 12 - Filkins Fabric Company is considering the...Ch. 12 - The Ulmer Uranium Company is deciding whether or...Ch. 12 - The Aubey Coffee Company is evaluating the...Ch. 12 - Your division is considering two investment...Ch. 12 - The Scampini Supplies Company recently purchased a...Ch. 12 - You have just graduated from the MBA program of a...Ch. 12 - Prob. 2MCCh. 12 - Define the term “net present value (NPV).” What is...Ch. 12 - Prob. 4MCCh. 12 - Prob. 5MCCh. 12 - What is the underlying cause of ranking conflicts...Ch. 12 - Prob. 7MCCh. 12 - Prob. 8MCCh. 12 - Prob. 9MCCh. 12 - Prob. 10MCCh. 12 - In an unrelated analysis, you have the opportunity...Ch. 12 - Prob. 12MC
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