Compute the FW: $3500 market Value productivity attriībutable to equipment per year (Operating costs have already been deducted from the revenue) $8500 $8500 $8500 $8500 $8500 1 2 3 End of Year i= 25%/yr $23500 investment cost 5n
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- REPLACEMENT CHAIN The Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next 8 years. Machine A costs 8.9 million but will provide after-tax inflows of 4.5 million per year for 4 years. If Machine A were replaced, its cost would be 9.8 million due to inflation and its cash inflows would increase to 4.7 million due to production efficiencies. Machine B costs 13.9 million and will provide after-tax inflows of 4.3 million per year for 8 years. If the WACC is 9%, which machine should be acquired? Explain.Break-even sales under present and proposed conditions Kearney Company, operating at full capacity, sold 400,000 units at a price of $246.60 per unit during 20Y5. Its income statement for 20Y5 is as follows: The division of costs between fixed and variable is as follows: Management is considering a plant expansion program that will permit an increase of $8,631,000 (35.000 units at $246.60) in yearly sales. The expansion will increase fixed costs by $3,600,000 but will not affect the relationship between sales and variable costs. Instructions Determine for 20Y5 the total fixed costs and the total variable costs.Break-even sales under present and proposed conditions Kearney Company, operating at full capacity, sold 400,000 units at a price of $246.60 per unit during 20Y5. Its income statement for 20Y5 is as follows: The division of costs between fixed and variable is as follows: Management is considering a plant expansion program that will permit an increase of $8,631,000 (35.000 units at $246.60) in yearly sales. The expansion will increase fixed costs by $3,600,000 but will not affect the relationship between sales and variable costs. Instructions Determine the maximum operating income possible with the expanded plant.
- question 3 a) Price RM54 per unit Variable cost RM30 per unit Fixed costs RM9,000 Required return 15% Initial investment RM18,000 Life 4 years Assume the initial investment id depreciated straight line to zero over the life of the project. Ignoring the effect of taxes, calculate: i) Accounting break-even quantity. ii) Cash break-even quantity iii) Financial break-even quantity iv) Degree of operating leverage at financial break-even lvel of output.Cost of plant R3 600 000Import duty R 900 000Installation cost R 300 000Net cash flows Year 1-10 R1 400 000 per annum (excluding residual value)Residual/scrap value R1 200 000The company uses straight-line depreciation. The cost of capital for projects of similar risk is 18%. 2.1 Calculate the investment’s Accounting Rate of Return (ARR). Briefly explain if the ARR is acceptable or not based on a target rate of return of 40%. Assume a payback period of 4 years. Determine the payback period and state if the investment isacceptable or not. Calculate and comment on the viability of the proposed investment based on the net present value(NPV) method. Discuss whether the advantages of using the NPV method outweigh the disadvantagesYear Unit Sales 1 73,000 2 86,000 3 105,000 4 97,000 5 67,000 Production of the implants will require $1,500,000 in networking capital to start. It is expected that networking capital requirements are not changing over the life of the project. Total fixed costs are $3,300,000 per year,variable production costs are $225 per unit, and the units are priced at $375 each. The equipment needed to begin production has an installed cost of$16,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as a seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of the acquisition cost. The tax rate is 21 percent and the required returns is 18 percent. Based on these preliminary estimates, a) What is theNPV of the project? b) What is the IRR? please use excel!!
- Year Unit Sales 1 73,000 2 86,000 3 105,000 4 97,000 5 67,000 Production of the implants will require $1,500,000 in networking capital to start. It is expected that networking capital requirements are not changing over the life of the project. Total fixed costs are $3,300,000 per year,variable production costs are $225 per unit, and the units are priced at $375 each. The equipment needed to begin production has an installed cost of$16,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as a seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of the acquisition cost. The tax rate is 21 percent and the required returns is 18 percent. Based on these preliminary estimates, a) What is theNPV of the project? b) What is the IRR? USE EXCEL AND SHOW WORKINGYear Unit Sales 1 73,000 2 86,000 3 105,000 4 97,000 5 67,000 Production of the implants will require $1,500,000 in networking capital to start. It is expected that networking capital requirements are not changing over the life of the project. Total fixed costs are $3,300,000 per year,variable production costs are $225 per unit, and the units are priced at $375 each. The equipment needed to begin production has an installed cost of$16,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as a seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of the acquisition cost. The tax rate is 21 percent and the required returns is 18 percent. Based on these preliminary estimates, a) What is theNPV of the project? b) What is the IRR?A B Initial investment outlay ($) 200,000 275,000 Freight Charges ($) 20,000 30,000 Set Up charges ($) 5,000 7,000 Economic Life (Years) 10 10 Liquidation value at end of economic life ($) 12,000 17,000 Other fixed costs ($) 4,000 20,000 Production and sales volume (units) 9,000 12,000 Sales Price ($) 15 15 Variable Cost ($) 2.45 2.00 Rate of interest (%) 6 6 Ascertain the preferred project using:a. The profit comparison method. b. The average rate of return method. c. The static payback method d. Re-evaluate the projects using the Net Present Value. Are the results of the Project selection process the same? If different, what reasons can you offer?
- Q.1 KrishnaGems Ltd has just installed Equip.-R at a cost of Rs 2,00,000. Themachine has a five yearlife with no residual value. The annual volume ofproduction is estimated at 1,50,000 units, which can be sold at Rs 6 per unit.Annual operating costs are estimated at Rs 2,00,000 (excludingdepreciation) at this output level. Fixed costs are estimated at Rs 3 per unitfor the same level of production. KrishnaGems Ltd has just come acrossanother model called Equip.-S capable of giving the same output at anannual operating cost of Rs 1,80,000 (exclusive of depreciation). There willbe no change in fixed costs. Capital cost of this machine is Rs 2,50,000 andthe estimated life is for 5 years with no residual value.The company has anoffer for sale of Equip.-R at Rs 1,00,000. The cost of dismantling andremoval will be Rs 30,000. As the company has not yet commencedoperations, it wants to sell Machine-R and purchase Equip.-S. Nine GemsLtd will be a zero-tax company, for seven years in view of…Q3. Contribution Margin of Walls Corporation, Consumer division is Rs. 1900,000 and the fixed expenses is Rs. 2,200,000 per year. Company is considering to eliminate this consumer division. If the Consumer Division is eliminated, $1,700,000 of the above fixed expenses could be avoided. What will be the effect on Wall's profit next year if Consumer Division is eliminated?
