A pharmaceutical company has some existing semiautomated production equipment that they are considering replacing. This equipment has a present MV of $59,000 and a BV of $33,000. It has five more years of straight-line depreciation available (if kept) of $6,600 per year, at which time its BV would be $0. The estimated MV of the equipment five years from now (in year-zero dollars) is $18,000. The MV rate of increase on this type of equipment has been averaging 4.4% per year. The total operating and maintenance and other related expenses are averaging $27,500 (A$) per year. New automated replacement equipment would be leased. Estimated operating and maintenance and related company expenses for the new equipment are $11,900 per year. The annual leasing cost would be $24,300. The after-tax MARR (with an inflation component) is 6% per year (m); t = 25%; and the analysis period is five years. Based on an after-tax, A$ analysis, should the replacement be made? Base your answer on the actual IRR of the incremental cash flow. CIB The actual IRR of the incremental cash flow is %. (Round to one decimal place.)

A pharmaceutical company has some existing semiautomated production equipment that they are considering replacing. This equipment has a present MV of $59,000 and a BV of $33,000. It has five more years of straight-line depreciation available (if kept) of $6,600 per year, at which time its BV would be $0. The estimated MV of the equipment five years from now (in year-zero dollars) is $18,000. The MV rate of increase on this type of equipment has been averaging 4.4% per year. The total operating and maintenance and other related expenses are averaging $27,500 (A$) per year. New automated replacement equipment would be leased. Estimated operating and maintenance and related company expenses for the new equipment are $11,900 per year. The annual leasing cost would be $24,300. The after-tax MARR (with an inflation component) is 6% per year (m); t = 25%; and the analysis period is five years. Based on an after-tax, A$ analysis, should the replacement be made? Base your answer on the actual IRR of the incremental cash flow. CIB The actual IRR of the incremental cash flow is %. (Round to one decimal place.)

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 2E

See similar textbooks

Similar questions

Your company is contemplating the purchase of a large stamping machine. The machine will cost $180,000. With additional transportation and installation costs of $5,000 and $10,000, respectively, the cost basis for depreciation purposes is $195,000. Its MV at the end of five years is estimated as $40,000. The IRS has assured you that this machine will fall under a three-year MACRS class life category. The justifications for this machine include $40,000 savings per year in labor and $30,000 savings per year in reduced materials. The before-tax MARR is 20% per year, and the effective income tax rate is 40%. Use this information to solve, The taxable income for year three is most nearly (a) $5,010 (b) $16,450 (c) $28,880 (d) $41,120 (e) $70,000.
It is being decided whether or not to replace an existing piece of equipment with a newer, more productive one that costs $80,000 and has an estimated MV of $20,000 at the end of its useful life of six years. Installation charges for the new equipment will amount to $3,000; this is not added to the capital investment but will be an expensed item during the first year of operation. MACRS (GDS) depreciation (five-year property class) will be used. The new equipment will reduce direct costs (labor, maintenance, rework, etc.) by $10,000 in the first year, and this amount is expected to increase by $500 each year thereafter during its six-year life. It is also known that the BV of the fully depreciated old machine is $0 butthat its present fair MV is $14,000. The MV of the old machine will be zero in six years. The effective income tax rate is 40%. Solve, a. Determine the prospective after-tax incremental cash flow associated with the new equipment if it is believed that the existing…
Show the solutions in a step-by-step manner. 1. A certain building has a salvage value of P1,000,000 after 40 years. Annual depreciation is P2,000,000. Using the Straight Line Method, how many years should you sell the building for P30,000,000? 2. A machine costs P2,500,000. At the end of its economic life of six years, its salvage value is P800,000. Using the Sum of the Years Digit Method of Depreciation, what will be its book value for the first year? Prepare a depreciation schedule. plz answer dont answer by pen paper
Cori's Meats is looking at a new sausage system with an installed cost of $495,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $73,000. The sausage system will save the firm $175,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $32,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the NPV of this project?
Power to a remote transmitting station is provided by a diesel-electric generator unit. The original cost of the unit P65,000. It costs P2,000 to ship the unit to the job site An additional cost of P3,000 was incurred for installation. (a) Determine the annual depreciation cost by the straight line method, if the unit has an expected life of 10 years. The salvage value of the unit at the end of its life was estimated at P5,000. (b) Determine the annual depreciation cost by the sinking fund method. Assume that the annual charge for depreciation was deposited in a fund drawing compound interest at the rate of 5%
A construction company is considering acquiring a new earthmover. The purchase price is $105,000,and an additional $28,000 is required to modify the equipment for special use by the company. The equipment falls into the MACRS seven-year classification (the tax life), and it will be sold after five years (the project life) for $55,000.The purchase of the earthmover will have no effect on revenues, but the machine is expected to save the firm $70,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21%. Assume that the initial investment is to be financed by a bank loan at an interest rate of 6% payable annually. Determine the after-tax cash flows by using the generalized cash flow approach and the worth of the investment for this project if the firm's MARR is known to be 11%.
Tanaka Industrial Systems Company is trying to decide between two different conveyor belt systems. System A costs $275,000, has a 4-year life, and requires $81,000 in pretax annual operating costs. System B costs $355,000, has a 6-year life, and requires $75,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 22 percent and the discount rate is 9 percent. Calculate the EAC for both conveyor belt systems.
Liberty Airways is considering an investment of$800,000 in ticket purchasing kiosks at selected airports.The kiosks (hardware and software) have an expectedlife of four years. Extra ticket sales are expected to be60,000 per year at a discount price of $40 per ticket.Fixed costs, excluding depreciation of the equipment,are $400,000 per year, and variable costs are $24 perticket. The kiosks will be depreciated over four years,using the SL method with a zero salvage value. Theonetime commitment of working capital is expected tobe 1/12 of annual sales dollars. The after-tax MARR is15% per year, and the company pays income tax at therate of 34%. What’s the after-tax PW of this proposedinvestment? Should the investment be made?
Peachtree Construction Company, a highway contractor, is considering the purchase of a new trench excavator that costs 300000 and can dig a 3-foot-wide trench at the rate of 16 feet per hour. The contractor gets paid according to the usage of the equipment, 100 per hour. The expected average annual usage is 500 hours, and maintenance and operating costs will be 10 per hour. The contractor will depreciate the equipment by using a five-year MACRS, units-of-production method. At the end of five years, the excavator will be sold for 100000. Assuming the contractor’s marginal tax rate is 25% per year, determine the annual after-tax cash flow. In excel.
A certain newly created company installed a 10,000kW electric generating plant at a cost of P430 per kW. The estimated life of the plant is 15 years. Salvage value is conservatively set at x% of the first cost. The interest on the sinking fund deposit is 3.5%. The accumulated depreciation after 10 years is P2,483,595.
Barbara Thompson is considering the purchase of a piece of business rental property containing stores and offices at a cost of $350,000. Barbara estimates that annual receipts from rentals will be $55,000 and that annual disbursements. other than income taxes, will be about $18,000. The property is expected to appreciate at the annual rate of 5%. Barbara expects to retain the property for 20 years once it is acquired. Then it will be depreciated on the basis of the 39-year real-property class (MACRS), assuming that the property would be placed in service on January 1. Barbara's marginal tax rate is 30%, and her MARR is 10%. What would be the minimum annual total of rental receipts that would make the investment break even?
Certain new machinery used in manufacturing of motor vehicles, when placed in service, is estimated to cost $275,000. It is expected to reduce net annual operating expenses by $56,000 per year for 10 years and to have a $41,000 MV at the end of the 10th year. Assume that the firm is in the federal taxable income bracket of $335,000 to $10,000,000 and that the state income tax rate is 7.5%. State income taxes are deductible from federal taxable income. This machinery is to be depreciated using the MACRS (GDS). Develop the BTCFs and ATCFs and compute for the respective PWs at EOY 0 using an MARR of 12%.