Consider a machine that costs $40,000 and has a six-year useful life. At the end of the six years, it can be sold for $5,000 after all tax adjustments have been factored in. If the firm could earn an after-tax revenue of $5400 per year with this machine, should it be purchased at an interest rate of 13%?
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Consider a machine that costs $40,000 and has a six-year useful life. At the end of the six years, it can be sold for $5,000 after all tax adjustments have been factored in. If the firm could earn an after-tax revenue of $5400 per year with this machine, should it be purchased at an interest rate of 13%?
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- Your company is contemplating the purchase of a large stamping machine. The machine will cost $180,000. With additional transportation and installation costs of $5,000 and $10,000, respectively, the cost basis for depreciation purposes is $195,000. Its MV at the end of five years is estimated as $40,000. The IRS has assured you that this machine will fall under a three-year MACRS class life category. The justifications for this machine include $40,000 savings per year in labor and $30,000 savings per year in reduced materials. The before-tax MARR is 20% per year, and the effective income tax rate is 40%. Use this information to solve, The taxable income for year three is most nearly (a) $5,010 (b) $16,450 (c) $28,880 (d) $41,120 (e) $70,000.Market Top Investors, Incorporated, is considering the purchase of a $345, 000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight - line method, at which time it will be worth $78, 000. The computer will replace two office employees whose combined annual salaries are $89, 000. The machine will also immediately lower the firm's required net working capital by $78, 000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 23 percent. The appropriate discount rate is 11 percent. Calculate the NPV of this projectReplacement versus expansion cash flows- Tesla Systems has estimated the cash flows over the five-year lives of a project that will install new equipment to replace old equipment. If the firm makes this investment, it will sell the old equipment and receive after-tax proceeds of $1,551,000. If the firm decides not to undertake this project, the old equipment will remain in service and generate the cash flows listed in years 1 through 5, and it will have no value after five years. These cash flows are summarized in the following table: New equipment Old equipmentNew equipment cost -4,645,000 Year Operating cash flows 1 551,000 372,000 2 931,000 372,000 3 1,344,000 372,000 4 2,221,000 372,000 5 3,399,000 372,000 New Equipment Old Equipment New Equipment Cost -$4,645,000 Year Operating Cash Flows 1 $551,000 $372,000 2 $931,000 $372,000 3 $1,344,000 $372,000 4 $2,221,000 $372,000 5 $3,399,000…
- Greenleaf Company is considering the purchase of a new set of air-electric quill units to replace an obsolete machine. The current machine has a market value of zero; however, it is in good working order, and it will last physically for at least an additional five years. The new quill units will perform the operation with so much more efficiency that the firm's engineers estimate that labor, material, and other direct costs will be reduced by $3,000 a year if the units are installed. The new set of quill units costs $10,000 delivered and installed, and its economic life is estimated to be five years with zero salvage value. The firm's MARR is 10%.(a) What is the investment required to keep the old machine?(b) Compute the cash flow to use in the analysis of each option.(c) If the firm uses the internal-rate-of-return criterion, would the analysis indicate that the firm should buy the new machine?Greenleaf Company is considering the purchase of a new set of air-electric quill units to replace an obsolete machine. The current machine has a market value of zero; however, it is in good working order, and it will last physically for at least an additional five years. The new quill units will perform the operation with so much more efficient that the firm's engineers estimate that labor, material, and other direct costs will be reduced by $3,000 a year if the units are installed. The new set of quill units costs $10,000 delivered and installed, and its economic life is estimated to be five years with zero salvage value. The firm's MARR is 10%.(a) What is the investment required to keep the old machine?(b) Compute the cash flow to use in the analysis of each option.(c) If the firm uses the internal-rate-of-return criterion, would the analysis indicatethat the firm should buy the new machine?Your company is considering a new computer system with an initial cost of $1 million. When implemented, the system will save $300,000 per year in inventory and administration costs. The system has a service life of five years and is classified in the three-year MACRS category. At the end of the fifth year, its residual value was estimated at $50,000. The system has no impact on net working capital. The marginal tax rate is 40 per cent. The required rate of return is 8 per cent.
- G&W Machine Shop is evaluating the proposed acquisition of a new milling machine in 2019. The investment in year zero will be $162,000. The milling machine has an estimated service life of five years, with a salvage value of $45,000. With this milling machine, the firm will be able to manufacture 10,000 units per year, and the unit price would be $17.19. However, it requires a specially trained operator to run the machine. The estimated unit labor cost will be $6.00, and the unit material cost will be $4.50. In addition, the company operation will entail $10,000 in annual overhead expenses (fixed cost).The milling machine falls into the seven-year MACRS class. Also, assume that $64,800 of the initial investment is obtained through debt financing. The loan is to be repaid in equal annual installments at 12% interest (annual effective rate) over five years. The remaining will be provided by equity (e.g., from retained earnings) What is the maximum amount that you recommend to G &…Barbara Thompson is considering the purchase of a piece of business rental property containing stores and offices at a cost of $350,000. Barbara estimates that annual receipts from rentals will be $55,000 and that annual disbursements. other than income taxes, will be about $18,000. The property is expected to appreciate at the annual rate of 5%. Barbara expects to retain the property for 20 years once it is acquired. Then it will be depreciated on the basis of the 39-year real-property class (MACRS), assuming that the property would be placed in service on January 1. Barbara's marginal tax rate is 30%, and her MARR is 10%. What would be the minimum annual total of rental receipts that would make the investment break even?Gordon Inc. has a number of copiers that were bought four years ago for $20,000. Currently maintenance costs $2,000 a year, but the maintenance agreement expires at the end of two years and thereafter the annual maintenance charge will rise to $8,000. The machines have a current resale value of $8,000, but at the end of year 2 their value will have fallen to $3,500. By the end of year 6 the machines will be valueless and would be scrapped. Gordon is considering replacing the copiers with new machines that would do essentially the same job. These machines cost $25,000, and the company can take out an eight-year maintenance contract for $1,000 a year. The machines have no value by the end of the eight years and would be scrapped. Both machines are depreciated by using seven-year MACRS, and the tax rate is 35 percent. Assume for simplicity that the inflation rate is zero. The real cost of capital is 7 percent. When should Gordon replace its copiers, now, the end of year 2, or the end of…
- Your firm is contemplating the purchase of a new $540,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $50,000 at the end of that time. You will save $275,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $70,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project?Certain new machinery used in manufacturing of motor vehicles, when placed in service, is estimated to cost $275,000. It is expected to reduce net annual operating expenses by $56,000 per year for 10 years and to have a $41,000 MV at the end of the 10th year. Assume that the firm is in the federal taxable income bracket of $335,000 to $10,000,000 and that the state income tax rate is 7.5%. State income taxes are deductible from federal taxable income. This machinery is to be depreciated using the MACRS (GDS). Develop the BTCFs and ATCFs and compute for the respective PWs at EOY 0 using an MARR of 12%.A small manufacturing firm is considering the purchase of a new machine to modernize one of its current production lines. Two types of machines are available on the market. The lives of Machine A and Machine B are four years and six years, respectively, but the firm does not expect to need the service of either machine for more than five years. The machines have the following expected receipts and disbursements: After four years of use, the salvage value for Machine B will be $1,000. The firm always has another option: to lease a machine at $3,000 per year, fully maintained by the leasing company. The lease payment will be made at the beginning of each year.(a) How many decision alternatives are there?(b) Which decision appears to be the best at i = 10%?
