For its computer assembly business, Kento Electronics is thinking about purchasing a more advanced equipment. Consideration is given to five models (J, K, L, M, and N) with various attributes. The following table lists the expected cash flows associated with each model: n 0 1 2 3 4 5 6 J -P 2,700,000 700,000 700,000 700,000 800,000 800,000 1.300.000 K -P 1,700,000 420,000 420,000 420,000 420,000 420,000 800.000 L -P 2,000,000 560,000 560,000 560,000 560,000 560,000 980.000 M -P 1,500,000 350,000 350,000 350,000 300,000 300,000 600.000 N -P 2,300,000 640,000 650,000 660,000 670,000 680,000 1.130.000

For its computer assembly business, Kento Electronics is thinking about purchasing a more advanced equipment. Consideration is given to five models (J, K, L, M, and N) with various attributes. The following table lists the expected cash flows associated with each model: n 0 1 2 3 4 5 6 J -P 2,700,000 700,000 700,000 700,000 800,000 800,000 1.300.000 K -P 1,700,000 420,000 420,000 420,000 420,000 420,000 800.000 L -P 2,000,000 560,000 560,000 560,000 560,000 560,000 980.000 M -P 1,500,000 350,000 350,000 350,000 300,000 300,000 600.000 N -P 2,300,000 640,000 650,000 660,000 670,000 680,000 1.130.000

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 3E

See similar textbooks

Similar questions

You are considering purchasing a new punch press machine. This machine will have an estimated service life of 10 years. The expected after-tax salvage value at the end of service life will be 10% of the purchase cost. Its annual after-tax operating cash flows are estimated to be $60,000. If you can purchase the machine at $308,758, what is the expected rate of return on this investment?(a) 12%(b) 13.6%(c) 15%(d) 17.2%
A UK manufacturer of particle board furniture is considering investing in a new stamping machine. The machine is expected to have a useful life of five years, after which the machine can be sold as scrap for an estimated £5000. The firm plans to issue bonds to pay for the machine and intends to treat the interest rate on the bonds as the relevant discount rate for evaluating the project. The machine will cost the firm £175,000, all of which must be paid at the beginning of the project. The new stamping machine will reduce costs £50,000 per year, for each year of the machineʹs life. The firm treats all the cost savings as if they occur at year end. Should the firm plan to undertake the investment project, bonds will be issued in approximately three months. The firm has estimated the supply and demand for loanable funds given by these equations:LD = 25,000,000 - 125,000,000r LS = 2,500,000 + 62,500,000r(1) Given the information above, should the firm undertake the investment in the…
Consider the following two mutually exclusive projects: (a) At an interest rate of 25%, which project would you recommend choosing?(b) Compute the area of negative project balance, discounted payback period, and area of positive project balance for each project. Which project isexposed to a higher risk of loss if either project terminates at the end ofyear 2?
Consider the following two mutually exclusive service projects with projectlives of three years and two years, respectively. (The mutually exclusive service projects will have identical revenues for each year of service.) The interest rate is known to be 12%. Net Cash Flow End of Year Project A Project B 0 -$1,000 -$800 1 -400 -200 2 -400 -200+0 3 -400+200 If the required service period is six years and both projects can be repeated with the given costs and better service projects are unavailable in the future, which project is better and why? Choose from the following options:(a) Select Project B because it will save you $344 in present worth over the required service period.(b) Select Project A because it will cost $1,818…
Consider the following two mutually exclusive investment projects: Salvage values represent the net proceeds (after tax) from the disposal of assets if they are sold at the end of the year listed. Both projects will be available (and can be repeated) with the same costs and salvage values for an indefinite period.(a) With an infinite planning horizon, which project is a better choice atMARR= 12%?(b) With a 10-year planning horizon, which project is a better choice atMARR= 12%?
You have been asked to evaluate the profitability of building a new distribution center under the following conditions:I. The proposal is for a distribution center costing $1,500,000. The facility has an expected useful life of 35 years and a net salvage value (net proceeds from its sale after tax adjustments) of $225,000.II. Annual savings (due to a better strategic location) of $227,000 are expected, annual maintenance and administrative costs will be $114,000, and annual income taxes are $43,000. Suppose that the firm's MARR is 12%. Determine the net present worth of the investment.
Bear Stationaries is thinking about expanding its facilities. In considering the expansion, Bear’s CFO has obtained the following information: The expansion will require the company to purchase today (t = 0) $5 million of equipment. The equipment will be depreciated over the following four years at the following rate: Year 1: 33% Year 2: 45 Year 3: 15 Year 4: 7 The expansion will require the company to increase its net operating working capital by $500,000 today (t = 0). This net operating working capital will be recovered at the end of four years (t = 4). The equipment is not expected to have any salvage value at the end of four years. The company’s operating costs, excluding depreciation, are expected to be 60 percent of the company’s annual sales. The expansion will increase the company’s dollar sales. The projected increases, all relative to current sales are: Year 1: $3.0 million Year 2: 3.5 million Year 3: 4.5 million Year 4: 4.0 million (For example, in Year 4…
Smith and Co. has to choose between two mutually exclusive projects. If it chooses project A, Smith and Co. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 10%? Cash Flow Project A Project B Year 0: –$17,500 Year 0: –$40,000 Year 1: 10,000 Year 1: 8,000 Year 2: 16,000 Year 2: 16,000 Year 3: 15,000 Year 3: 15,000 Year 4: 12,000 Year 5: 11,000 Year 6: 10,000 $15,731 $11,012 $12,585 $9,439 $14,158 Smith and Co. is considering a three-year project that has a weighted average cost of capital…
Cori's Meats is looking at a new sausage system with an installed cost of $495,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $73,000. The sausage system will save the firm $175,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $32,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the NPV of this project?
A proposed project will require the immediate investment of $50,000 and is estimated to have year-end revenues and costs as follows: Year Revenue Costs 1 2 3 4 5 $ 75,000 90,000 100,000 95,000 60,000 $ 60,000 77,500 75,000 80,000 47,500 An additional investment of $20,000 will be required at the end of the second year. The project would terminate at the end of the 5th year, and the assets are estimated to have a salvage value of $25,000 at the time. Solve for the IRR of the project by PW using 15% and 16% rates. A. 15.68% B. 15.28% C. 15.88% D. 15.48%
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.
A group of concerned citizens has established a trust fund that pays 6% interest compounded monthly to preserve a historical building by providing annual maintenance funds of $25,000 forever. Compute the capitalized-equivalent amount for these building maintenance expenses.