Question atatched An industrial organization studying the relative desirability of two diesel enginesproposed for installation has estimated that the annual operating costs for engine Ais Tk. 40,000 and for engine B is Tk. 35000. What is the added justifiable investmentfor engine B if the cost of money use is 8 percent of the investment, taxes are 4 percentof 80 percent of the first cost, insurance is 0.3 percent of investment, and annualdepreciation charge has been set at 5 percent of the total investment?

Relative Desirability : Based on the quantity of investment in one asset in an organization, how…

Answered: An industrial organization studying the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 18P

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Average rate of returncost savings Maui Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of 125,000 with a 15,000 residual value and an eight-year life. The equipment will replace one employee who has an average wage of 28,000 per year. In addition, the equipment will have operating and energy costs of 5,150 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.
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?
Postman Company is considering two independent projects. One project involves a new product line, and the other involves the acquisition of forklifts for the Materials Handling Department. The projected annual operating revenues and expenses are as follows: Required: Compute the after-tax cash flows of each project. The tax rate is 40 percent and includes federal and state assessments.
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?
Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%. Division A has a weighted average cost of Capital of 9.5% and is looking at a new project that will generate a profit of $1,200,000 from a machine that costs $4,000,000. Division B has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,350,000 from a machine that costs $5,000.000. A. Calculate the EVA for each of Banyans divisions. B. Calculate the RI for each of Banyans division. C. If Banyan uses EVA to evaluate the projects, which division has the better project and by how much? D. If Banyan uses RI, which division has the better project and by how much? E. What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?
Thaler Company bought 26,000 of raw materials a year ago in anticipation of producing 5,000 units of a deluxe version of its product to be priced at 75 each. Now the price of the deluxe version has dropped to 35 each, and Thaler is now deciding whether to produce 1,500 units of the deluxe version at a cost of 48,000 or to scrap the project. What is the opportunity cost of this decision? a. 175,000 b. 375,000 c. 48,000 d. 26,000
Verde Company reported operating costs of 50,000,000 as of December 31, 20x5, with the following environmental costs: Required: 1. Prepare an environmental cost report, classifying costs by quality category and expressing each as a percentage of total operating costs. What is the message of this report? 2. Prepare a pie chart that shows the relative distribution of environmental costs by category. What does this report tell you? 3. What if Verde deliberately did not include the cost of damaging the ecosystem because of solid waste disposal in its environmental cost report? Offer possible reasons for this decision. If consciously avoided, is this decision unethical?
Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Maui Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $121,000 with a $10,000 residual value and a 10-year life. The equipment will replace one employee who has an average wage of $20,255 per year. In addition, the equipment will have operating and energy costs of $5,880 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. If required, round to the nearest whole percent.fill in the blank 1 of 1 %
Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $101,000 with a $9,000 residual value and a ten-year life. The equipment will replace one employee who has an average wage of $21,230 per year. In addition, the equipment will have operating and energy costs of $4,880 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. If required, round to the nearest whole percent
The estimated cost of a completely installed andready-to-operate 40-kilowatt generator is $32,000. Itsannual maintenance costs are estimated at $800. Theenergy that can be generated annually at full load isestimated to be 100,000 kilowatt-hours. If the valueof the energy generated is $0.09 per kilowatt-hour,how long will it take before this machine becomesprofitable? Take the MARR to be 10% and the salvage value of the machine to be $2,000 at the end ofits estimated life of 15 years.
Northwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $171,600 with a $20,400 residual value and a 10-year life. The equipment will replace one employee who has an average wage of $44,200 per year. In addition, the equipment will have operating and energy costs of $4,120 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. If required, round to the nearest whole percent.

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