Blooper Industries is considering to replace its magnesium purification system. The company uses straight-line depreciation to a zero book value over the useful life of its equipment system. Whichever machine is purchased will be replaced at the end of its useful life, and have no salvage value at the end of its useful life. - Machine A costs $1,127,000, has annual operating costs of $19,500, and has a 5-year life. - Machine B has a cost of $892,000, annual operating costs of $26,300, and a 4-year life. If the discount rate is 15% and the firm tax rate is 35%, Blooper Industries should purchase Machine because it lowers the firm's annual cost by approximately machine. as compared to the other

Blooper Industries is considering to replace its magnesium purification system. The company uses straight-line depreciation to a zero book value over the useful life of its equipment system. Whichever machine is purchased will be replaced at the end of its useful life, and have no salvage value at the end of its useful life. - Machine A costs $1,127,000, has annual operating costs of $19,500, and has a 5-year life. - Machine B has a cost of $892,000, annual operating costs of $26,300, and a 4-year life. If the discount rate is 15% and the firm tax rate is 35%, Blooper Industries should purchase Machine because it lowers the firm's annual cost by approximately machine. as compared to the other

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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Freida Company is considering an asset replacement project ofreplacing a control device. This old control device has been fullydepreciated but can be sold for $5,000. The new control device, whichis more automated, will cost $42,000. The new device’s installation andshipping costs will total $16,000. The new device will be depreciatedon a straight-line basis over its 2-year economic life to an estimatedsalvage value of $0. The actual salvage value of this device at the endof 2-year period (That is, the market value of the device at the end of2-year period) is estimated to be $4,000. If the replacement project is accepted, Freida will require an initial working capital investment of$2,200 (that is, adding $2,200 initially to its net working capital).During the 1st year of operations, Freida expects its annual revenue toincrease from $72,800 to $90,000. After the 1st year, revenues fromthe replacement are expected to increase at a rate of $2,800 a year forthe remainder of the project…
Freida Company is considering an asset replacement project ofreplacing a control device. This old control device has been fullydepreciated but can be sold for $5,000. The new control device, whichis more automated, will cost $42,000. The new device’s installation andshipping costs will total $16,000. The new device will be depreciatedon a straight-line basis over its 2-year economic life to an estimatedsalvage value of $0. The actual salvage value of this device at the endof 2-year period (That is, the market value of the device at the end of2-year period) is estimated to be $4,000. If the replacement project is accepted, Freida will require an initial working capital investment of$2,200 (that is, adding $2,200 initially to its net working capital).During the 1st year of operations, Freida expects its annual revenue toincrease from $72,800 to $90,000. After the 1st year, revenues fromthe replacement are expected to increase at a rate of $2,800 a year forthe remainder of the project…
A new barcode reading device has an installed cost basis of $22,820 and an estimated service life of nine years. It will have a zero salvage value at that time. The 150% declining balance method is used to depreciate this asset. What is the gain (or loss) on the disposal of the device if it is sold for $3,200 after eight years?
Freida Company is considering an asset replacement project of replacing a control device. This old control device has been fully depreciated but can be sold for $5,000. The new control device, which is more automated, will cost $42,000. The new device’s installation and shipping costs will total $16,000. The new device will be depreciated on a straight-line basis over its 2-year economic life to an estimated salvage value of $0. The actual salvage value of this device at the end of 2-year period (That is, the market value of the device at the end of 2-year period) is estimated to be $4,000. If the replacement project is accepted, Freida will require an initial working capital investment of $2,200 (that is, adding $2,200 initially to its net working capital). During the 1st year of operations, Freida expects its annual revenue to increase from $72,800 to $90,000. After the 1st year, revenues from the replacement are expected to increase at a rate of $2,800 a year for the remainder of…
Rust Industrial Systems is trying to decide between two different conveyor belt systems. System A costs $276,000, has a four-year life, and requires $84,000 in pretax annual operating costs. System B costs $390,000, has a six-year life, and requires $78,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 24 percent and the discount rate is 8 percent. Calculate the EAC for both conveyor belt systems. Note: Your answers should be negative values and indicated by minus signs. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. System A System B Which conveyor belt system should the firm choose? System A System B
Metlock Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years ago at a cost of $121,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $43.500. The new equipment can be bought for $173,440, including installation. Over its 10-year life, it will reduce operating expenses from $190,600 to $148,700 for the first six years, and from $202,600 to $191,800 for the last four years. Net working capital requirements will also increase by $20,900 at the time of replacement. It is estimated that the company can sell the new equipment for $24,100 at the end of its life. Since the new equipment's cash flows are relatively certain, the project's cost of capital is set at 10%, compared with 15% for an average-risk project. The firm's maximum acceptable payback period is 5 years.…
Sandhill Inc. wants to purchase a new machine for $37,840, excluding $1,300 of installation costs. The old machine was purchased 5 years ago and had an expected economic life of 10 years with no salvage value. The old machine has a book value of $2,100, and Sandhill Inc. expects to sell it for that amount. The new machine will decrease operating costs by $8,000 each year of its economic life. The straight-line depreciation method will be used for the new machine for a 6-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 enter the cash payback period in years rounded to 2 decimal places years (b)Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal rate of return enter the internal rate of return in…
Sheridan Inc. wants to purchase a new machine for $44,300, excluding $1,500 of installation costs. The old machine was purchased 5 years ago and had an expected economic life of 10 years with no salvage value. The old machine has a book value of $2,200, and Sheridan Inc. expects to sell it for that amount. The new machine will decrease operating costs by $10,000 each year of its economic life. The straight-line depreciation method will be used for the new machine for a 6-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 4.36 years (b) Determine the approximate internal rate of return. (Round answer to 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal rate of return % (c) Assuming the company has a required rate of return of 9%, determine whether the new machine should…
Sheridan Company is contemplating the replacement of an old machine with a new one. The following information has been gathered: Price Accumulated Depreciation Remaining useful life Useful life: Annual operating costs Old Machine $240000 72000 10 years $192000 New Machine $480000 -0- 10 years $144000 If the old machine is replaced, it can be sold for $19200. The company uses straight-line depreciation with a zero salvage value for all of its assets. Which of the following amounts is relevant to the replacement decision?
Coronado Industries is contemplating the replacement of an old machine with a new one.. The following information has been gathered: Old Machine New Machine $260000 $520000 Price 78000 Accumulated Depreciation 0- Remaining useful life 10 years -0- 10 years Useful life -0- Annual operating costs $215000 $156000 If the old machine is replaced, it can be sold for $20800. The company uses straight-line depreciation with a zero salvage value for all of its assets The net advantage (disadvantage) of replacing the old machine is O$(5200) O $(52000) $21500 $90800
A new CNC machine has an installed with a cost basis of $35,000 and an estimated service life of seven years. It will have a zero-salvage value at that time. The 200% declining balance method is used to depreciate this asset. What will the depreciation charge be in year seven? What will be the book value at the end of year six? c. What will be the gain (or loss) on the disposal of the asset if it is sold for $1,200 after six years?
Brown Company is considering the purchase of a new machine to replace an existing one. The old machine was purchased 3 years ago at a cost of $3,000, and it is being depreciated on a straight-line basis to a zero salvage value over a 6-year life. The current market value of the old machine is $2,000. The new machine, which falls into the MACRS 3-year class, has an estimated life of 3 years, it costs $5,000, and Brown plans to sell the machine at the end of the fifth year for $200. The applicable depreciation rates are 0.33, 0.45, 0.15, and 0.07. The new machine is expected to generate before-tax cash savings of $500 per year. The company's tax rate is 40 percent. if the firm’s cost of capital is 14 percent, what is the NPV of the proposed project?

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