Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 6, Problem 21QP
Summary Introduction
To determine: NPV and IRR to make replacement decision.
The net present value is the differential amount between the net
The internal rate of return is an integral part of capital budgeting decisions which is termed as a discount rate at which the cash flows of a particular project are equated at nil value.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
A firm is considering an investment in a new machine with a price of $18.03 million to
replace its existing machine. The current machine has a book value of $6.03 million, and
a market value of $4.53 million. The new machine is expected to have a four-year life,
and the old machine has four years left in which it can be used. If the firm replaces the
old machine with the new machine, it expects to save $6.73 million in operating costs
each year over the next four years. Both machines will have no salvage value in four
years. If the firm purchases the new machine, it will also need an investment of
$253,000 in net working capital. The required return on the investment is 10 percent and
the tax rate is 23 percent.
a. What is the NPV of the decision to purchase a new machine? (Do not round
intermediate calculations and enter your answer in dollars, not millions of dollars,
rounded to 2 decimal places, e.g., 1,234,567.89.)
b. What is the IRR of the decision to purchase a new machine? (Do…
A firm is considering an investment in a new machine with a price of $16.9 million to replace its existing machine. The current machine has a book value of $6.6 million and a market value of $5.3 million. The new machine is expected to have a 4-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.9 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $370,000 in net working capital. The required return on the investment is 12 percent and the tax rate is 22 percent. The company uses straight-line depreciation.
What is the NPV of the decision to purchase a new machine?
I am having a lot of truoble setting this problem up in Excel and cannot figure it out? Year 0 CF? Year 1 CF? How to do the NPV? Both new and old machines? Same…
Bhupatbhai
Chapter 6 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 6 - Opportunity Cost In the context of capital...Ch. 6 - Prob. 2CQCh. 6 - Incremental Cash Flows Your company currently...Ch. 6 - Depreciation Given the choice, would a firm prefer...Ch. 6 - Prob. 5CQCh. 6 - Prob. 6CQCh. 6 - Equivalent Annual Cost When is EAC analysis...Ch. 6 - Prob. 8CQCh. 6 - Capital Budgeting Considerations A major college...Ch. 6 - To answer the next three questions, refer to the...
Ch. 6 - Prob. 11CQCh. 6 - To answer the next three questions, refer to the...Ch. 6 - Calculating Project NPV Flatte Restaurant is...Ch. 6 - Calculating Project NPV The Best Manufacturing...Ch. 6 - Calculating Project NPV Down Under Boomerang,...Ch. 6 - Calculating Project Cash Flow from Assets In the...Ch. 6 - Prob. 5QPCh. 6 - Project Evaluation Your firm is contemplating the...Ch. 6 - Project Evaluation Dog Up! Franks is looking at a...Ch. 6 - Prob. 8QPCh. 6 - Calculating NPV Howell Petroleum is considering a...Ch. 6 - Calculating EAC You are evaluating two different...Ch. 6 - Cost-Cutting Proposals Massey Machine Shop is...Ch. 6 - Prob. 12QPCh. 6 - Prob. 13QPCh. 6 - Comparing Mutually Exclusive Projects Vandalay...Ch. 6 - Capital Budgeting with Inflation Consider the...Ch. 6 - Prob. 16QPCh. 6 - Prob. 17QPCh. 6 - Cash flow Valuation Phillips Industries runs a...Ch. 6 - Equivalent Annual Cost Bridgton Golf Academy is...Ch. 6 - Prob. 20QPCh. 6 - Prob. 21QPCh. 6 - Prob. 22QPCh. 6 - Calculating Project NPV With the growing...Ch. 6 - Calculating Project NPV You have been hired as a...Ch. 6 - Calculating Project NPV Pilot Plus Pens is...Ch. 6 - EAC and Inflation Office Automation, Inc., must...Ch. 6 - Project Analysis and Inflation Dickinson Brothers,...Ch. 6 - Project Evaluation Aday Acoustics, Inc., projects...Ch. 6 - Calculating Required Savings A proposed...Ch. 6 - Calculating a Bid Price Another utilization of...Ch. 6 - Prob. 31QPCh. 6 - Prob. 32QPCh. 6 - Replacement Decisions Suppose we are thinking...Ch. 6 - Prob. 34QPCh. 6 - Project Analysis and Inflation The Biological...Ch. 6 - Prob. 36QPCh. 6 - Prob. 37QPCh. 6 - Prob. 38QPCh. 6 - Prob. 1MC1Ch. 6 - GOODWEEK TIRES, INC. After extensive research and...
Knowledge Booster
Similar questions
- Gina 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_forwardFriedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.arrow_forwardA firm is considering an investment in a new machine with a price of $15.9 million to replace its existing machine. The current machine has a book value of $5.7 million and a market value of $4.4 million. The new machine is expected to have a 4-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.45 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $280,000 in net working capital. The required return on the investment is 11 percent and the tax rate is 23 percent. The company uses straight-line depreciation. a)- What is the NPV of the decision to purchase the new machine? b) What is the IRR of the decision to purchase the new machine? c) WHat is the NPV of the decison to keep using the old machine? d) What is the IRR of the decison to keep…arrow_forward
- A firm is considering an investment in a new machine with a price of $17.6 million to replace its existing machine. The current machine has a book value of $7.3 million and a market value of $6 million. The new machine is expected to have a 4-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $7.25 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $440,000 in net working capital. The required return on the investment is 11 percent and the tax rate is 24 percent. The company uses straight-line depreciation. What is the NPV of the decision to purchase a new machine? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) What is the IRR of the decision to purchase a…arrow_forwardA firm is considering an investment in a new machine with a price of $16.6 million to replace its existing machine. The current machine has a book value of $6.3 million and a market value of $5 million. The new machine is expected to have a 4-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.75 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $340,000 in net working capital. The required return on the investment is 9 percent and the tax rate is 24 percent. The company uses straight-line depreciation. a. What is the NPV of the decision to purchase a new machine? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the…arrow_forwardThe plant manager of IHK is considering the purchase of a new robotic assemble plant. The new robotic line will cost $250,000. The manager believes that the new investment will result in direct labor savings of $62,500 per year for ten years.Requirements:a. What is the payback period for this projectb. What is the net present value or PV assuming a 10% rate of return?c. Should the plant manager accept or reject the project?d. What else should the manager consider in the analysis?arrow_forward
- 4arrow_forwardYOU ARE A FINANCIAL ANALYST FOR A COMPANY THAT IS CONSIDERING A NEW PROJECT. IF THE PROJECT IS ACCEPTED, IT WILL USE A FRACTION OF A STORAGE FACILITY THAT THE COMPANY ALREADY OWNS BUT CURRENTLY DOES NOT USE. THE PROJECT IS EXPECTED TO LAST 10 YEARS, AND THE ANNUAL DISCOUNT RATE IS 10% (COMPOUNDED ANNUALLY). YOU RESEARCH THE POSSIBILITIES, AND FIND THAT THE ENTIRE STORAGE FACILITY CAN BE SOLD FOR €100,000 AND A SMALLER (BUT BIG ENOUGH) FACILITY CAN BE ACQUIRED FOR €40,000. THE BOOK VALUE OF THE EXISTING FACILITY IS €60,000, AND BOTH THE EXISITING AND THE NEW FACILITIES (IF IT IS ACQUIRED) WOULD BE DEPRECIATED STRAIGHT LINE OVER 10 YEARS (DOWN TO A ZERO BOOK VALUE). THE CORPORATE TAX RATE IS 40%. DISCUSS WHAT IS THE OPPORTUNITY COST OF USING THE EXISTING STORAGE CAPACITY?arrow_forwardA surgical device company is proposing a plant expansion for a new product line, that is expected to cost $32 million now and another $8 million 2 years from now. If the total operating costs will be $1.4 million per year starting 1 year from now, and the estimated salvage value of the plant is zero, how much must the company make annually in years 1 through 10 to recover its investment plus a return of 16% per year?arrow_forward
- The directors of EMY plc are currently considering an investment in a new production machinery to replace an existing one. The new machinery would produce goods more efficiently, leading to increased sales volume. The investment required will be GH¢1,150,000 payable at the start of the project. The alternative course of action would be to continue using the existing machinery for a further five years, at the end of which time it would have to be replaced. The following forecasts of sales and production volumes have been made: Sales in units Year Using existing machinery Using new machinery GH¢ GH¢ 1 400,000 560,000 2 450,000 630,000 3 500,000 700,000 4 600,000 840,000 5 750,000 1,050,000 Production in units Year Using existing machinery Using new machinery GH¢ GH¢ 1 420,000 564,000 2 435,000 637,000 3 505,000 695,000 4 610,000 840,000 5 730,000 1,044,000…arrow_forwardAssumption Corporation is considering replacing an obsolete machine with a new machine. The new machine would cost P250,000 and would have a ten-year useful life. The new machine would cost P12,000 per year to operate and maintain, but would save P55,000 per year in labor and other costs. The old machine can be sold now for P10,000. The simple rate of return on the new machine is closest to: a. 17.9% b. 7.5% c. 22.0% d. 7.2%arrow_forwardOwearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning