Engineering Economy, Student Value Edition (17th Edition)
17th Edition
ISBN: 9780134838137
Author: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher: PEARSON
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Chapter 13, Problem 10P
To determine
Whether the firm should borrow and buy or lease.
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The Shell Corporation has a 34% tax rate and owns a piece of petroleum-drilling
equipment that costs $119,000 and will be depreciated at a CCA rate of 30%. Shell will
lease the equipment to others and each year receive $33,100 in rent. At the end of
five years, the firm will sell the equipment for $31,600. All values are presented in
today's dollars.
Calculate the overall present worth of these cash flows with tax effects if market
interest rate is 10% and annual inflation rate is 2%.
(Note: Don't use the $ sign in your answer and round it up to 2 decimal
places)
One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $160,000 today. The CCA rate applicable to both machines is 40%; neither machine will have any long-term salvage value. You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of $40,000 per year for the next ten years. The current machine is expected to produce EBITDA of $23,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your company's tax rate is 45%, and the opportunity cost of capital for this type of equipment is 12%.
What is the NPV of replacement?
Should your company replace its year-old machine?
//posted before but got wrong answer
One year ago, your company purchased a machine used in manufacturing for $105,000. You have learned that a new
machine is available that offers many advantages and you can purchase it for $160,000 today. It will be depreciated on
a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross
margin (revenues minus operating expenses other than depreciation) of $60,000 per year for the next 10 years. The
current machine is expected to produce a gross margin of $21,000 per year. The current machine is being depreciated
on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current
machine is $9,545 per year. The market value today of the current machine is $65,000. Your company's tax rate is
40%, and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its year-old
machine?
The NPV of replacing the year-old machine is $
(Round to the…
Chapter 13 Solutions
Engineering Economy, Student Value Edition (17th Edition)
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