Engineering Economy
16th Edition
ISBN: 9780133582819
Author: Sullivan
Publisher: DGTL BNCOM
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Question
Chapter 13, Problem 10P
To determine
Whether the firm should borrow and buy or lease.
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The Shell Corporation has a 34% tax rate and owns a piece of petroleum-drilling
equipment that costs $119,000 and will be depreciated at a CCA rate of 30%. Shell will
lease the equipment to others and each year receive $33,100 in rent. At the end of
five years, the firm will sell the equipment for $31,600. All values are presented in
today's dollars.
Calculate the overall present worth of these cash flows with tax effects if market
interest rate is 10% and annual inflation rate is 2%.
(Note: Don't use the $ sign in your answer and round it up to 2 decimal
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One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $160,000 today. The CCA rate applicable to both machines is 40%; neither machine will have any long-term salvage value. You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of $40,000 per year for the next ten years. The current machine is expected to produce EBITDA of $23,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your company's tax rate is 45%, and the opportunity cost of capital for this type of equipment is 12%.
What is the NPV of replacement?
Should your company replace its year-old machine?
//posted before but got wrong answer
I need help in figuring out the step by step procedure, performing the operations and calculations manually, using formulas.
One year ago, your company purchased a machine used in manufacturing for $110,000. The current machine is expected to produce EBITDA of $20,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $10,000 per year. The market value today of the current machine is $50,000.
You have learned that a new machine is available that offers many advantages; you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value.
You expect that the new machine will produce EBITDA (earning before interest, taxes, depreciation, and amortization) of $40,000 per year for the next 10 years.
All other expenses of the two machines are identical.Your company’s tax…
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