Assume everything is given in n=0, CONSTANT dollars unless otherwise stated: Hartsfield Company is considering purchasing a set of machine tools at a cost of $90,000. The purchase is expected to generate revenues of $40,000, increasing by 8% each year directly due to increasing sales volumes (reminder: all values are given as constant dollar values). The purchase of the tools will also lead to operating costs of $9,000 per year in each of the next three years. Additional profits will be taxed at a rate of 40%. The asset falls into CCA Class 45 (rate = 40%) for tax purposes and the 50% rule applies. The project has a three-year life. The constant-dollar market (re- sale) value of the machine tools is expected to be $18 ,000. The machine tools will be purchased 50% on debt (so 50% of the tools' cost will be borrowed). The debt will be paid off in equal annual payments over the life of the project. The interest rate on the debt was negotiated at 11% annually. The general inflation rate is 6% per year (and affects everything that it normally affects). Assume a MARR' = 7%. (Remember to round up/down to whole dollar figures for EVERY entry in the income statement and cash flow statement. Solutions are also rounded to the nearest dollar. Note: .5 rounds up) The IRR' is within .5% of 14% 15% 16% O 17% 18% O None of the above
Assume everything is given in n=0, CONSTANT dollars unless otherwise stated: Hartsfield Company is considering purchasing a set of machine tools at a cost of $90,000. The purchase is expected to generate revenues of $40,000, increasing by 8% each year directly due to increasing sales volumes (reminder: all values are given as constant dollar values). The purchase of the tools will also lead to operating costs of $9,000 per year in each of the next three years. Additional profits will be taxed at a rate of 40%. The asset falls into CCA Class 45 (rate = 40%) for tax purposes and the 50% rule applies. The project has a three-year life. The constant-dollar market (re- sale) value of the machine tools is expected to be $18 ,000. The machine tools will be purchased 50% on debt (so 50% of the tools' cost will be borrowed). The debt will be paid off in equal annual payments over the life of the project. The interest rate on the debt was negotiated at 11% annually. The general inflation rate is 6% per year (and affects everything that it normally affects). Assume a MARR' = 7%. (Remember to round up/down to whole dollar figures for EVERY entry in the income statement and cash flow statement. Solutions are also rounded to the nearest dollar. Note: .5 rounds up) The IRR' is within .5% of 14% 15% 16% O 17% 18% O None of the above
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 22P
Related questions
Question
Transcribed Image Text:Assume everything is given in n=0,. CONSTANT dollars unless otherwise stated:
Hartsfield Company is considering purchasing a set of machine tools at a cost of
$90,000. The purchase is expected to generate revenues of $40,000, increasing by
8%
each year directly due to increasing sales volumes (reminder: all values are given as
constant dollar values). The purchase of the tools will also lead to operating costs of
$9,000 per year in each of the next three years. Additional profits will be taxed at a
rate of 40%. The asset falls into CCA Class 45 (rate = 40%) for tax purposes and the
50% rule applies. The project has a three-year life. The constant-dollar market (re-
sale) value of the machine tools is expected to be $18 ,000. The machine tools will
be purchased 50% on debt (so 50% of the tools' cost will be borrowed). The debt will
be paid off in equal annual payments over the life of the project. The interest rate on
the debt was negotiated at 11% annually.
The general inflation rate is 6% per year (and affects everything that it normally
affects). Assume a MARR' = 7%.
(Remember to round up/down to whole dollar figures for EVERY entry in the income
statement and cash flow statement. Solutions are also rounded to the nearest dollar.
Note: .5 rounds up)
The IRR' is within .5% of
14%
15%
16%
17%
18%
None of the above
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College