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a.
Adequate information:
Cost of new computer = $580,000
Useful life of new computer = 5 years
Pre-tax salvage value of new computer = $130,000
Saving in operating cost of new computer = $85,000
Cost of old computer = $450,000
Sale value of old computer = $230,000
Pre-tax salvage value of old computer = $60,000
Discount rate, r = 14% or 0.14
Tax rate = 21% or 0.21
To compute: Whether to replace the old computer and invest in the new computer.
Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.
b.
Adequate information:
Cost of new computer = $580,000
Useful life of new computer = 5 years
Pre-tax salvage value of new computer = $130,000
Saving in operating cost of new computer = $85,000
Cost of old computer = $450,000
Depreciation on the old computer per year = 90,000
Sale value of old computer = $230,000
Pre-tax salvage value of old computer = $60,000
Discount rate, r = 14% or 0.14
Tax rate = 21% or 0.21
To compute:
- The relevant cash flows
- Whether to replace the old computer and invest in the new computer.
Introduction:
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Chapter 6 Solutions
Loose Leaf for Corporate Finance Format: Loose-leaf
- Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,660,000; the new one will cost, $2,001,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $435,000 after five years. The old computer is being depreciated at a rate of $352,000 per year. It will be completely written off in three years. If we don't replace it now, we will have to replace it in two years. We can sell it now for $549,000; in two years, it will probably be worth $159,000. The new machine will save us $373,000 per year in operating costs. The tax rate is 25 percent, and the discount rate is 12 percent. a-1. Calculate the EAC for the the old computer and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. What is the NPV of the decision to replace the computer now? (A negative answer should…arrow_forwardSuppose we are thinking about replacing an old computer with a new one. The old one cost us $1,330,000; the new one will cost $1,590,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $330,000 after five years. The old computer is being depreciated at a rate of $ 266,000 per year. It will be completely written off in three years. If we don't replace it now, we will have to replace it in two years. We can sell it now for $450,000; in two years, it will probably be worth $123,000. The new machine will save us $293,000 per year in operating costs. The tax rate is 23 percent and the discount rate is 12 percent. Calculate the EAC for the old computer and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e .g., 32.16.) What is the NPV of the decision to replace the computer now? (A negative answer should be indicated…arrow_forwardSuppose we are thinking about replacing an old computer with a new one. The old one cost us $1,620,000; the new one will cost, $1,949,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $405,000 after five years. The old computer is being depreciated at a rate of $336,000 per year. It will be completely written off in three years. If we don't replace it now, we will have to replace it in two years. We can sell it now for $531,000; in two years, it will probably be worth $153,000. The new machine will save us $363,000 per year in operating costs. The tax rate is 23 percent, and the discount rate is 10 percent. a-1. Calculate the EAC for the the old computer and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. What is the NPV of the decision to replace the computer now? (A negative answer should…arrow_forward
- Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,960,000; the new one will cost, $2,531,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $660,000 after five years. The old computer is being depreciated at a rate of $472,000 per year. It will be completely written off in three years. If we don't replace it now, we will have to replace it in two years. We can sell it now for $684,000; in two years, it will probably be worth $204,000. The new machine will save us $413,000 per year in operating costs. The tax rate is 25 percent, and the discount rate is 8 percent. a-1. Calculate the EAC for the the old computer and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a - What is the NPV of the decision to replace the computer now? (A negative answer should be…arrow_forwardSuppose we are thinking about replacing an old computer with a new one. The old one cost us $1,680,000; the new one will cost, $2,027,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $450,000 after five years. The old computer is being depreciated at a rate of $360,000 per year. It will be completely written off in three years. If we don't replace it now, we will have to replace it in two years. We can sell it now for $558,000; in two years, it will probably be worth $162,000. The new machine will save us $378,000 per year in operating costs. The tax rate is 21 percent, and the discount rate is 12 percent. a-1. Calculate the EAC for the the old computer and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. What is the NPV of the decision to replace the computer now? (A negative answer should…arrow_forwardTyrell Corp. is considering replacing a machine. The old one is currently being depreciated at $70,000 per year (straight-line), and is scheduled to end in five years with no remaining book value. If you don’t replace it, you will be lucky to get it removed for the amount you could salvage it for, so you don’t expect any profit in five years. If you replace the old machine now, you believe you can salvage it for $375,000 and buy a new machine for $850,000, plus $25,000 shipping fee and another $25,000 for installation. The new machine will not change the revenue or NOWC, but it will reduce the operating costs of the company by $145,000 per year. The new machine will be depreciated using the three-year MACRS schedule (the table is provided on the Moodle for your convenience). The useful life of this machine is five years, and it is expected that the machine can be sold at $20,000 at the end of the five years. Assume a tax rate of 25% and the cost of capital for the company is 8%.…arrow_forward
- Tyrell Corp. is considering replacing a machine. The old one is currently being depreciated at $70,000 per year (straight-line), and is scheduled to end in five years with no remaining book value. If you don't replace it, you will be lucky to get it removed for the amount you could salvage it for, so you don't expect any profit in five years. If you replace the old machine now, you believe you can salvage it for $375,000 and buy a new machine for $850,000, plus $25,000 shipping fee and another $25,000 for installation. The new machine will not change the revenue or NOWC, but it will reduce the operating costs of the company by $145,000 per year. The new machine will be depreciated using the three-year MACRS schedule (the table is provided on the Moodle for your convenience). The useful life of this machine is five years, and it is expected that the machine can be sold at $20,000 at the end of the five years. Assume a tax rate of 25% and the cost of capital for the company is 8%.…arrow_forwardDenny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $340,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $50,000 per year to operate and maintain, but would save $95,000 per year in labor and other costs. The old machine can be sold now for scrap for $30,000. The simple rate of return on the new machine is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)arrow_forwardDenny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $180,000 and would have a twelve-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $26, 000 per year to operate and maintain, but would save $58,000 per year in labor and other costs. The old machine can be sold now for scrap for $18,000. The simple rate of return on the new machine is closest to (Ignore income taxes.):arrow_forward
- The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $55,000. The machine would replace an old piece of equipment that costs $14,000 per year to operate. The new machine would cost $6,000 per year to operate. The old machine currently in use could be sold now for a salvage value of $20,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.)arrow_forwardDell is considering replacing one of its material handling systems. It has an annual O&M cost of $48,000, a remaining operational life of 8 years, and an estimated salvage value of $6,000 at that time. A new system can be purchased for $175,000. It will be worth $50,000 in 8 years, and it will have annual O&M costs of only $17,000 per year due to new technology. If the new system is purchased, the old system will be traded in for $55,000, even though the old system can be sold for only $45,000 on the open market. Leasing a new system will cost $31,000 per year, payable at the beginning of the year, plus operating costs of $15,000 per year payable at the end of the year. If the new system is leased, the existing material handling system will be sold for its market value of $45,000. Use a planning horizon of 8 years, an annual worth analysis, and MARR of 15% to decide which material handling system to recommend: (i) keep existing, (ii) trade in existing and purchase new, or (iii)…arrow_forwardDenny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $290,000 and have a tenericals controll nortunately, the new machine would have no salvage value. The new machine would cost $48,000 per year to operate and maintain but would save $89,000 per year in labor and other costs. The old machine can be sold now for scrap for $29,000. The simple rate of return on the new machine is closest to (Ignore income taxes.):arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
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