CCA Manufacturing is considering replacing a broken metal cutting machine. Several options have been proposed. Option 1: The broken machine can be sold today for P 15,000 Option 2: It can be overhauled completely for P20000 after which it will produce P8000in annual cashflow over the next 5 years. The resale value of the asset at the end of 5years is 3,000 Option 3: It can be replaced for P 35,0o0. The life of the replacement Machine is 5 years and an estimated salvage value of of P15,000 At the end of 5 years. Anticipated operating cash inflows for each year will be P12,000. If firm's requirement rate is 12%, which option is most viable? Factor Table - i = 12.00% P/F P/A P/G F/P F/A A/P A/F A/G 0.8929 0.8929 0.000 L.1200 1.00 1.1200 1.000 0.000 0.4717 0.2963 0.5917 2 3 0.7118 0.7972 1.6901 0.7972 1.2544 2.1200 0.4717 2.4018 2.2208 1.4049 3.3744 0.4163 0.9246 4 0.6355 3.0373 4.1273 1.5735 4.7793 0.3292 0.2092 1.389 5 0.5674 3.6048 6.3970 1.7623 6.3528 0.2774 0.1574 1.7746 Option 1 PV= Option 2 PV= Option 3 PV= Answer:

CCA Manufacturing is considering replacing a broken metal cutting machine. Several options have been proposed. Option 1: The broken machine can be sold today for P 15,000 Option 2: It can be overhauled completely for P20000 after which it will produce P8000in annual cashflow over the next 5 years. The resale value of the asset at the end of 5years is 3,000 Option 3: It can be replaced for P 35,0o0. The life of the replacement Machine is 5 years and an estimated salvage value of of P15,000 At the end of 5 years. Anticipated operating cash inflows for each year will be P12,000. If firm's requirement rate is 12%, which option is most viable? Factor Table - i = 12.00% P/F P/A P/G F/P F/A A/P A/F A/G 0.8929 0.8929 0.000 L.1200 1.00 1.1200 1.000 0.000 0.4717 0.2963 0.5917 2 3 0.7118 0.7972 1.6901 0.7972 1.2544 2.1200 0.4717 2.4018 2.2208 1.4049 3.3744 0.4163 0.9246 4 0.6355 3.0373 4.1273 1.5735 4.7793 0.3292 0.2092 1.389 5 0.5674 3.6048 6.3970 1.7623 6.3528 0.2774 0.1574 1.7746 Option 1 PV= Option 2 PV= Option 3 PV= Answer:

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 2P

See similar textbooks

Similar questions

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?
The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $1,080,000, and it would cost another $22,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the first 3 years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $380,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 35%. What is the Year-0 cash flow? What are the net operating cash flows in Years 1, 2, and 3? What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)? If the project’s cost of capital is 12%, should the machine be purchased?
Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Garnette Corp is considering the purchase of a new machine that will cost $342,000 and provide the following cash flows over the next five years: $99,000, $88,000, $92,000. $87,000, and $72,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel. see Appendix C.
Consolidated Aluminum is considering the purchase of a new machine that will cost $308,000 and provide the following cash flows over the next five years: $88,000, 92,000, $91,000, $72,000, and $71,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel, see Appendix C.
Gallant Sports s considering the purchase of a new rock-climbing facility. The company estimates that the construction will require an initial outlay of $350,000. Other cash flows are estimated as follows: Assuming the company limits its analysis to four years due to economic uncertainties, determine the net present value of the rock-climbing facility. Should the company develop the facility if the required rate of return is 6%?