14.3 Air Links, a commuter airline company, is considering replacing one of its baggage handling machines with anewer and more efficient one. The current book value of the old machine is $50,000, and it has a remaining useful life offive years. The salvage value expected from scrapping the old machine at the end of five years is zero, but the company.can sell the machine now to another firm in the industry for $10,000. The new baggage handling machine has apurchase price of $120,000 and an estimated useful life of seven years. It has an estimated salvage value of $30,000 andis expected to realize economic savings on electric power usage, labor, and repair costs and also to reduce the amountof damaged luggage. In total, an annual savings of $50,000 will be realized if the new machine is installed. The firm usesa 15% MARR. Using the opportunity cost approach, (a) What is the initial cash outlay required for the new machine? (b)What are the cash flows for the defender in years 0 to 5? (c) Should the airline purchase the new machine? Explain allthe steps and Explain clearly how we can take the cashflows for defender and challenger

Let's examine in more depth how to determine the cash flows' present worth (PW) and arrive at a…

Answered: 14.3 Air Links, a commuter airline…

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 4E

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Market Top Investors, Incorporated, is considering the purchase of a $345, 000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight - line method, at which time it will be worth $78, 000. The computer will replace two office employees whose combined annual salaries are $89, 000. The machine will also immediately lower the firm's required net working capital by $78, 000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 23 percent. The appropriate discount rate is 11 percent. Calculate the NPV of this project
Greenleaf Company is considering the purchase of a new set of air-electric quill units to replace an obsolete machine. The current machine has a market value of zero; however, it is in good working order, and it will last physically for at least an additional five years. The new quill units will perform the operation with so much more efficiency that the firm's engineers estimate that labor, material, and other direct costs will be reduced by $3,000 a year if the units are installed. The new set of quill units costs $10,000 delivered and installed, and its economic life is estimated to be five years with zero salvage value. The firm's MARR is 10%.(a) What is the investment required to keep the old machine?(b) Compute the cash flow to use in the analysis of each option.(c) If the firm uses the internal-rate-of-return criterion, would the analysis indicate that the firm should buy the new machine?
Greenleaf Company is considering the purchase of a new set of air-electric quill units to replace an obsolete machine. The current machine has a market value of zero; however, it is in good working order, and it will last physically for at least an additional five years. The new quill units will perform the operation with so much more efficient that the firm's engineers estimate that labor, material, and other direct costs will be reduced by $3,000 a year if the units are installed. The new set of quill units costs $10,000 delivered and installed, and its economic life is estimated to be five years with zero salvage value. The firm's MARR is 10%.(a) What is the investment required to keep the old machine?(b) Compute the cash flow to use in the analysis of each option.(c) If the firm uses the internal-rate-of-return criterion, would the analysis indicatethat the firm should buy the new machine?
Gordon Inc. has a number of copiers that were bought four years ago for $20,000. Currently maintenance costs $2,000 a year, but the maintenance agreement expires at the end of two years and thereafter the annual maintenance charge will rise to $8,000. The machines have a current resale value of $8,000, but at the end of year 2 their value will have fallen to $3,500. By the end of year 6 the machines will be valueless and would be scrapped. Gordon is considering replacing the copiers with new machines that would do essentially the same job. These machines cost $25,000, and the company can take out an eight-year maintenance contract for $1,000 a year. The machines have no value by the end of the eight years and would be scrapped. Both machines are depreciated by using seven-year MACRS, and the tax rate is 35 percent. Assume for simplicity that the inflation rate is zero. The real cost of capital is 7 percent. When should Gordon replace its copiers, now, the end of year 2, or the end of…
34 - Which of the following is incorrect regarding the economic life statement?A) It means economic service year.B) Operating costs do not increase with the wear and tear of machines.C) It is time to retire.D) The machine's service life is over.E) It means it's time to be taken out of service.
Consider a machine that costs $40,000 and has a six-year useful life. At the end of the six years, it can be sold for $5,000 after all tax adjustments have been factored in. If the firm could earn an after-tax revenue of $5400 per year with this machine, should it be purchased at an interest rate of 13%?
I need some help with these questions and can you please show me all the steps? (A) If a piece of machinery depreciates at an annual rate of 5.85%, how many years will it take for the machinery’s value to reduce to a quarter of its original value? (B) A cafe finds that the demand equation for its new coffee blend product is given by: Q= 28/p0.85, Where P is the price per cup and Q is the number of cups served per hour. Find the elasticity of demand, Ed. (C) Find the effective annual rate for an interest rate of 8.5% p.a. compounded monthly. Answer as a percentage to 2 decimals
On 2021 January 2, a new printing machine was acquired for $900,000. The machine has an estimated salvage value of $100,000 and an estimated useful life of 10 years. The machine is expected to produce a total of 500,000 units of election materials throughout its useful life. Compute depreciation for 2021 and 2022 using each of the following methods: Straight line. Units of production (assume 30,000 and 60,000 units were produced in 2021 and 2022, respectively). Double-declining balance.
On January 2, 2000 the Gonzalo Corporation purchases an automatic soldering machine for ₱18,000. The corporation plans to transfer the machine to subsidiary at the end of 2005 for ₱11,000.Determine the life of the machine so that the book value at the end of 2005 will be ₱11,000 if the salvage value after L years should be 4,000 using:a) straight-line method b) double declining balance method
Atlantic Control Company purchased a machine two years ago at a cost of $70,000. At that time, the machine’s expected economic life was six years and its salvage value at the end of its life was estimated to be $10,000. It is being depreciated using the straight line method so that its book value at the end of six years is $10,000. In four years, however, the old machine will have a market value of $0. A new machine can be purchased for $80,000, including shipping and installation costs. The new machine has an economic life estimated to be four years. Three-year MACRS depreciation will be used. During its four-year life, the new machine will reduce cash operating expenses by $20,000 per year. Sales are not expected to change. But the new machine will require net working capital to be increased by $4,000. At the end of its useful life, the machine is estimated to have a market value of $2,500. What is the NPV of this project? Should Atlantic replace the old machine (assuming a…
A small manufacturing firm is considering the purchase of a new machine to modernize one of its current production lines. Two types of machines are available on the market. The lives of Machine A and Machine B are four years and six years, respectively, but the firm does not expect to need the service of either machine for more than five years. The machines have the following expected receipts and disbursements: After four years of use, the salvage value for Machine B will be $1,000. The firm always has another option: to lease a machine at $3,000 per year, fully maintained by the leasing company. The lease payment will be made at the beginning of each year.(a) How many decision alternatives are there?(b) Which decision appears to be the best at i = 10%?
Downtown Abbey Corp. wants to buy a new sheep-shearing machine. It has narrowed down the choice to two machines that can do the job equally well: Machine name The Shearilizer Naked Sheep Purchase price 10,000 20,000 Useful life (years) 4 7 Maintenance cost (end of each year) 4,000 3,000 The relevant discount rate is 10%. There are no taxes. What is the net present value of all costs associated with the Shearilizer (in absolute terms)? What is the equivalent annual annuity for the Shearilizer (in absolute terms)? What is the equivalent annual annuity for the Naked Sheep (in absolute terms)? Which machine should the company buy? The one with the higher equivalent annual cost The one with the lower equivalent annual cost

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