2) Bart and Millhouse own a small factory that manufactures rubber snakes used to scare away birds from houses, gardens and playgrounds. A recent and unexplained increase in the bird population in Springfield has significantly increased the demand for rubber snakes. To take advantage of this opportunity, Bart and Millhouse plan to add a new molding machine that will double the output of their existing facility. The cost of the new machine is $20,000. With this purchase, current assets must increase by $5,000 and current liabilities will increase by $3,000. The economic life of the machine is 4 years, and it falls under the MACRS three year depreciation schedule. The machine is expected to be obsolete at the end of the fourth year and have no salvage value. Bart and Millhouse anticipate recouping 100% of the additional investment in net working capital at the end of year 4. Sales are expected to increase by $20,000 each year in year 1 and 2 and by $10,000 each year in year 3 and 4. The increase in operating expenses is estimated to be 20% of the annual change in sales. Assume that the marginal tax rate is 40%. Assume that the company's discount rate is 14%. Calculate the NPV of this project. Would you recommend that Bart and Millhouse add this machine to their factory?
2) Bart and Millhouse own a small factory that manufactures rubber snakes used to scare away birds from houses, gardens and playgrounds. A recent and unexplained increase in the bird population in Springfield has significantly increased the demand for rubber snakes. To take advantage of this opportunity, Bart and Millhouse plan to add a new molding machine that will double the output of their existing facility. The cost of the new machine is $20,000. With this purchase, current assets must increase by $5,000 and current liabilities will increase by $3,000. The economic life of the machine is 4 years, and it falls under the MACRS three year depreciation schedule. The machine is expected to be obsolete at the end of the fourth year and have no salvage value. Bart and Millhouse anticipate recouping 100% of the additional investment in net working capital at the end of year 4. Sales are expected to increase by $20,000 each year in year 1 and 2 and by $10,000 each year in year 3 and 4. The increase in operating expenses is estimated to be 20% of the annual change in sales. Assume that the marginal tax rate is 40%. Assume that the company's discount rate is 14%. Calculate the NPV of this project. Would you recommend that Bart and Millhouse add this machine to their factory?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:2) Bart and Millhouse own a small factory that manufactures rubber snakes used to scare away birds from houses, gardens and playgrounds. A recent and unexplained increase in the bird population in Springfield
has significantly increased the demand for rubber snakes. To take advantage of this opportunity, Bart and Millhouse plan to add a new molding machine that will double the output of their existing facility. The cost of the
new machine is $20,000. With this purchase, current assets must increase by $5,000 and current liabilities will increase by $3,000. The economic life of the machine is 4 years, and it falls under the MACRS three year
depreciation schedule. The machine is expected to be obsolete at the end of the fourth year and have no salvage value.
Bart and Millhouse anticipate recouping 100% of the additional investment in net working capital at the end of year 4. Sales are expected to increase by $20,000 each year in year 1 and 2 and by $10,000 each year in
year 3 and 4. The increase in operating expenses is estimated to be 20% of the annual change in sales. Assume that the marginal tax rate is 40%.
Assume that the company's discount rate is 14%. Calculate the NPV of this project. Would you recommend that Bart and Millhouse add this machine to their factory?
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