Hand written solutions are strictly prohibited A machine purchased a year ago for $85,000 costs more to operate than anticipated. At the time of the purchase, it was expected tobe used for 10 years with annual maintenance costs of $22,000 and a salvage value of $10,000. However, last year, it incurred a cost$40,000, which is expected to escalate to $41,200 this year and increase by $1,200 each year thereafter. The market value is nowestimated to be $74,000-$10,000k, where k is the number of years since the machine was purchased. It is now estimated that themachine will be useful for a maximum of 5 more years. A replacement study is to be performed. Determine the values of P. n. AOC foryear 5 and 5 of this defender.The value of Pis $[The value of n isThe AOC for year 5 is[The value of Sis $years.

Terminal year cash flows describes the cash flows anticipated to happen at the conclusion of a…

Answered: A machine purchased a year ago for…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 3P

See similar textbooks

Similar questions

Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and Machine 360-6, which has a cost of $360,000, a 6-year life, and after-tax cash flows of $98,300 per year. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Filkins’ cost of capital is 14%. Should the firm replace its old knitting machine? If so, which new machine should it use? By how much would the value of the company increase if it accepted the better machine? What is the equivalent annual annuity for each machine?
Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
St. Johns River Shipyards welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost 182,500 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from 27,000 to 74,000 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 25%, and the project cost of capital is 12%. What is the NPV if the firm replaces the old welder with the new one?
BSU Inc. wants to purchase a new machine for $34,608, excluding $1,300 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage value. This old machine now has a book value of $1,900, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $7,800 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a six-year period with no salvage value. Click here to view the factor table. (a) Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.) Cash payback period (b) 4.36 Internal rate of return. Determine the approximate internal rate of return. (Round answer to O decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) years. 19 %
A machine purchased 1 year ago for $85,000 costs more to operate than anticipated. When purchased, the machine was expected to be used for 10 years with annual maintenance costs of $22,000 and a $10,000 salvage value. However, last year, it cost the company $35,000 to maintain it, and these costs are expected to escalate to $36,500 this year and increase by $1500 each year thereafter. The market value is now estimated to be $85,000 − $10,000k, where k is the number of years since the machine was purchased. It is now estimated that this machine will be useful for a maximum of 5 more years. A replacement study is to be performed now. Determine the values of P, n, AOC, and S of this defender.
A company is considering replacing an old piece of machinery, which cost $600,000and has $350,000 of accumulated depreciation to date, with a new machine that has apurchase price of $545,000. The old machine could be sold for $231,000. The annualvariable production costs associated with the old machine are estimated to be $61,000per year for eight years. The annual variable production costs for the new machine areestimated to be $19,000 per year for eight years. a.) Prepare and show in solution a differential analysis dated September 13 on whetherto continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). b.) What is the sunk cost in the scenario?
A $25,000 machine that has been used for one year has a salvage value of $16,000 now, which will drop by $4000 per year. The maintenance costs for the next 4 years are $1250, $1450, $1750, and $2250. When the machine is sold, it will cost $2000 to remove and sell. When the machine was purchased, the estimated salvage value in 5 years was $3500. What are the relevant costs for the machine?
The company you work for is planning to buy a new rock crushing machine to replace an existing one. The purchase price of a new machine is $60,000. Estimates for the operating and maintenance (O&M) costs for the new machine are that it will be $4,500 the first year and will then increase $3,000 per year every year there after. The new machine follows a declining balance depreciation model. The salvage values after the first year is estimated to be $48,000. The company uses a MARR of 6.5% for all financial analysis. Determine the depreciation rate of the new rock crushing machine What is the Economic Life of the new machine and the minimum Equivalent Annual Cost (EAC)? Show ALL your calculations to justify your answer.
A machine purchased 3 years ago for $140,000 is currently too slow to satisfy increased demand. The machine can be upgraded now for $90,000 or sold to a smaller company for $40,000. The current machine will have an annual operating cost of $85,000 per year and a $30,000 salvage value in 3 years. If upgraded, the presently owned machine will definitely be retained for 3 more years. The replacement, which will serve the company now and for at least 8 years, will cost $203,500. Its salvage value will be $50,000 for years 1 through 5, $20,000 after 6 years, and $10,000 thereafter. It will have an estimated operating cost of $65,000 per year. The company asks you to perform an economic analysis at 15% per year using a 3-year planning horizon. Should the company replace the presently owned machine now, or do it 3 years from now? What are the AW values? The AW value of the defender is $− and the AW value of the challenger is $− .
Four years ago, a firm purchased an industrial batch oven for $23,000. The oven had an estimated life of IO years with $1,000 salvage value. These original estimates are still good. If sold now, the machine will bring in $2,000. If sold at the end of the year, it will bring in $1,500. The market value after the first year has decreased at annual rate of 25%. Annual operating costs for subsequent years are $3,800. A new machine will cost $50,000 and have a 12-year life with a $3,000 salvage value. The operating cost for the new machine will be $3,000 as of the end of each year, where the $6,000-per-year savings are due to better quality control. If the firm's MARR is 10%, should the new machine be purchased now?

Recommended textbooks for you

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Excel Applications for Accounting Principles

Accounting

ISBN:

9781111581565

Author:

Gaylord N. Smith

Publisher:

Cengage Learning

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Excel Applications for Accounting Principles

Accounting

ISBN:

9781111581565

Author:

Gaylord N. Smith

Publisher:

Cengage Learning

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Intermediate Financial Management (MindTap Course…

Finance

ISBN:

9781337395083

Author:

Eugene F. Brigham, Phillip R. Daves

Publisher:

Cengage Learning

Fundamentals Of Financial Management, Concise Edi…

Finance

ISBN:

9781337902571

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

SEE MORE TEXTBOOKS