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Unit VIII question 19 part a
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- Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and Machine 360-6, which has a cost of $360,000, a 6-year life, and after-tax cash flows of $98,300 per year. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Filkins’ cost of capital is 14%. Should the firm replace its old knitting machine? If so, which new machine should it use? By how much would the value of the company increase if it accepted the better machine? What is the equivalent annual annuity for each machine?An auto repair company needs a new machine that will check for defective sensors. The machine has an Initial investment of $224,000. Incremental revenues, including cost savings, are $120,000, and Incremental expenses, including depreciation, are $50,000. There is no salvage value. What is the accounting rate of return (ARR)?Alexander Industries is considering purchasing an insurance policy for its new office building in St. Louis, Missouri. The policy has an annual cost of $10,000. If Alexander Industries doesn’t purchase the insurance and minor fire damage occurs, a cost of $100,000 is anticipated; the cost if major or total destruction occurs is $200,000. The costs, including the state-of-nature probabilities, are as follows: Using the expected value approach, what decision do you recommend? What lottery would you use to assess utilities? (Note: Because the data are costs, the best payoff is $0.) Assume that you found the following indifference probabilities for the lottery defined in part (b). What decision would you recommend? Do you favor using expected value or expected utility for this decision problem? Why?
- Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?City Towing is considering the purchase of a new tow truck. The garage currently has no tow truck, and the $100,000 price tag for a new truck would be a major expenditure. The expected useful life is 7 years. The owner of the garage has compiled the following estimates in trying to determine whether the tow truck should be purchased: Purchase of truck $100,000 Salvage value $15,000 Additional net inflows per year $16,000 Repairs required at the end of year 3 $5,000 Minimum required return on investments 12%Papa John’s Pizza has a delivery car that is uses for pizza deliveries. The transmission needs to be replaced, and there are several other repairs that need to be done. The car is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. Papa John’s has put together the following budgetary items: Present Car New Car Purchase cost new $30,000 Transmission and repairs $6,500 Annual cash operating cost $8,500 $7,500 Fair market value now $6,000 Fair market value in five years $1,000 $6,000 If Papa John replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they purchase a new vehicle, they will sell the existing one and use the new vehicle for 5 years and then trade it in for another new pizza delivery vehicle. If they trade for the new delivery vehicle, their operating expenses will decrease because the new…
- Jake’s Shipping, Inc. needs to purchase a new fleet of light trucks for its shipping business. The firm is trying to decide whether to purchase trucks with diesel engines or trucks with gasoline engines. The diesel truck will have a useful life of 12 years, after which it will need to be replaced. The diesel truck costs $110,000 to purchase and its annual maintenance and operation costs will depend on the cost of regular maintenance/repairs and the cost of diesel fuel. In Years 1 through 5, its annual maintenance/repair costs are expected to be $2000 per year. In Years 6 through 12, its annual maintenance/repair costs are expected to be $2500 per year. The firm expects that the diesel truck will use 5,900 gallons of diesel fuel per year (Years 1 through 12) and believes that diesel fuel will cost $2.65 per gallon, on average, during the life of the truck. The gasoline truck only costs $60,000 to purchase but will have a useful life of only 4 years, after which it will need to be…Aerotron Electronics is considering purchasing a water filtration system to assist in circuit board manufacturing. The system costs $40,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow half of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to three equal annual payments, with the first payment due at the end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics’ MARR is 10% compounded annually. a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investmentsbased on present worth? c. Should Aerotron…Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $40,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow half of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to three equal annual payments, with the first payment due at end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics’ MARR is 10% compounded annually. Solve, a. What is the internal rate of return of this investment? b. What is the decision rule for judging the attractiveness of investments based on internal rate of…
- Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $40,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow half of the purchase price, but it cannot start repaying the loan for 2 years. The bank has agreed to three equal annual payments, with the first payment due at the end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics’ MARR is 10% compounded annually. Solve, a. What is the annual worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on annual worth? c. Should…"The supervisor of the county Department of Transportation (DOT) is considering the replacement of some machinery. This machinery has zero book value but its current market value is $800. One possible alternative is to invest in new machinery, which has a cost of $39,000. This new machinery would pro-duce estimated annual operating cash savings of $12,500. The estimated useful life of the new machin-ery is four years. The DOT uses straight-line depreciation. The new machinery has an estimated salvage value of $2,000 at the end of four years. The investment in the new machinery would require an addi-tional investment in working capital of $3,000, which would be recovered after four years.If the DOT accepts this investment proposal, disposal of the old machinery and investment in the new equipment will take place on December 31, 20x1. The cash flows from the investment will occur during the calendar years 20x2 through 20x5. Required: Prepare a net-present-value analysis…In 2018, the Port of Spain General Hospital purchases a scanner at a cost of $ 100,000. The scanner has a useful life of 5 years with no residual value. It is depreciated using the straight line method and its annual operating costs are $ 120,000. In 2019 the hospital is approached by another supplier to purchase a more modern machine for $ 115,000. This new machine has a life span of 4 years and will save $ 25,000 in annual operating costs. The new supplier is willing to buy the old scanner for $ 30,000. Required: a) Compute the gain or loss if the old scanner is replaced in 2019. b) Advise the hospital on the purchase of the new scanner.