New Project Analysis ExpectedSalvage $ CostUse, YearsValue New Equipment70,000.03.030,000.0 Install Cost, New Equipment15,000.0 Increase, Net Working Capital4,000.0 Before-Tax Cost-Savings/Year25,000.0 Marginal Tax Rate40.00% Cost Of Capital10.00% Year 1Year 2Year 3Year 43-Year MACRS Depreciation33.33%44.45%14.81%7.41% Answers Year 1Year 2Year 3Depreciation Tax Savings/Year After Tax Cost Savings/Year Year 3 Book Value Taxes On Sale, Year 3 After-Tax Salvage Value Additional Year 3 Cash Flow Year 0Year 1Year 2Year 3Net Cash Flow Net Cash Flow Net Present Value 'NPV' Purchase System?

in this you have to calculate after tax cash flow of each year than find out net present value.

Answered: $ Cost Use, Years Value New Equipment…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 5BE

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Cost of Capital, Net Present Value Leakam Companys product engineering department has developed a new product that has a 3-year life cycle. Production of the product requires development of a new process that requires a current 100,000 capital outlay. The 100,000 will be raised by issuing 60,000 of bonds and by selling new stock for 40,000. The 60,000 in bonds will have net (after-tax) interest payments of 3,000 at the end of each of the 3 years, with the principal being repaid at the end of Year 3. The stock issue carries with it an expectation of a 17.5% return, expressed in the form of dividends at the end of each year (with 7,000 in dividends expected for each of the next 3 years). The sources of capital for this investment represent the same proportion and costs that the company typically has. Finally, the project will produce after-tax cash inflows of 50,000 per year for the next 3 years. Required: 1. Compute the cost of capital for the project. (Hint: The cost of capital is a weighted average of the two sources of capital, where the weights are the proportion of capital from each source.) 2. CONCEPTUAL CONNECTION Compute the NPV for the project. Explain why it is not necessary to subtract the interest payments and the dividend payments and appreciation from the inflow of 50,000 in carrying out this computation.
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.
Net present value method for a service company Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for 70,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of 15,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be 65,000 per year for each of the next five years. A driver will cost 40,000 in 20Y1, with an expected annual salary increase of 2,000 for each year thereafter. The annual operating costs for the truck are estimated to be 6,000 per year. a. Determine the expected annual net cash flows from the delivery truck investment for 20Y120Y5. b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the present value table appearing in Exhibit 2 of this chapter. c. Is the additional truck a good investment based on your analysis? Explain.

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		New Project Analysis

		Expected	Salvage
	$ Cost	Use, Years	Value
New Equipment	70,000.0	3.0	30,000.0
Install Cost, New Equipment	15,000.0
Increase, Net Working Capital	4,000.0
Before-Tax Cost-Savings/Year	25,000.0
Marginal Tax Rate	40.00%
Cost Of Capital	10.00%

	Year 1	Year 2	Year 3	Year 4
3-Year MACRS Depreciation	33.33%	44.45%	14.81%	7.41%

Answers		Year 1	Year 2	Year 3
Depreciation Tax Savings/Year


After Tax Cost Savings/Year
Year 3 Book Value
Taxes On Sale, Year 3
After-Tax Salvage Value
Additional Year 3 Cash Flow

	Year 0	Year 1	Year 2	Year 3
Net Cash Flow
Net Cash Flow

Net Present Value 'NPV'
Purchase System?

$ Cost Use, Years Value New Equipment 70,000.0