The Cornchopper Company is considering the purchase of a new harvester.• The new harvester is not expected to affect revenue, but operating expenses willbe reduced by $13,100 per year for 10 years.The old harvester is now 5 years old, with 10 years of its scheduled life remaining.It was originally purchased for $67,000 and has been depreciated by the straight-line method.The old harvester can be sold for $21,100 today.• The new harvester will be depreciated by the straight-line method over its 10-yearlife.• The corporate tax rate is 21 percent.The firm's required rate of return is 14 percent.The initial investment, the proceeds from selling the old harvester, and anyresulting tax effects occur immediately.• All other cash flows occur at year-end.• The market value of each harvester at the end of its economic life is zero.Determine the break-even purchase price in terms of present value of the harvester. (Donot round intermediate calculations and round your answer to 2 decimal places, e.g.,32.16.)Purchase price

Financial break -even can be defined as a point where net present value of a project equates to zero…

Answered: Cornchopper Company is considering the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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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?
Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new 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?
The Cornchopper Company is considering the purchase of a new harvester. • The new harvester is not expected to affect revenue, but operating expenses will be reduced by $13,600 per year for 10 years. • The old harvester is now 5 years old, with 10 years of its scheduled life remaining. It was originally purchased for $74,000 and has been depreciated by the straight- line method. • The old harvester can be sold for $21,600 today. • The new harvester will be depreciated by the straight-line method over its 10-year life. • The corporate tax rate is 21 percent. . The firm's required rate of return is 15 percent. • The initial investment, the proceeds from selling the old harvester, and any resulting tax effects occur immediately. • All other cash flows occur at year-end. . The market value of each harvester at the end of its economic life is zero.
The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $550,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $250,000. The old machine is being depreciated by $110,000 per year, using the straight-line method. The new machine has a purchase price of $1,100,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $160,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $245,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC. a. What initial cash…
The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newerand more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years.The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell itnow to another firm in the industry for $265,000. The old machine is being depreciated toward a zerosalvage value, or by $120,000 per year, using the straight-line method. The new machine has a purchaseprice of $1,175,000, an estimated useful life 6 year and fall under 5 years MACRS, and an estimated salvagevalue of $145,000. The applicable depreciation rates are 20 percent, 32 percent, 19 percent, 12 percent, 11percent, and 6 percent. It is expected to economize on electric power usage, labor, and repair costs, as well asto reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the newmachine is installed. The company’s…
International Soup Company is considering replacing a canning machine. The old machine is being depreciated by the straight-line method over a 10-year recovery period from a depreciable cost basis of $120,000. The old machine has 5 years of remaining usable life, at which time its salvage value is expected to be zero, and it can be sold now for $40,000. This machine has a current book value of $60,000. The purchase price of the new machine is $250,000. Employees were sent to a training course last year on how to use the new machine; this training cost $5,000. The new machine has a 5-year life and an expected salvage value of $25,000. Annual savings of electricity, labor, and materials from use of the new machine are estimated at $40,000. The company is in a 40 percent tax bracket and its cost of capital is 16 percent. The MACRS depreciation method will be used and the recovery percentages for assets with a 5-year class life are given below What is the initial cash outlay for the new…
The Bigbee Bottling Company is contemplating the replacementof one of its bottling machines with a newer and more efficient one. The old machinehas a book value of $600,000 and a remaining useful life of 5 years. The firm does not expectto realize any return from scrapping the old machine in 5 years, but it can sell it now toanother firm in the industry for $265,000. The old machine is being depreciated by $120,000per year, using the straight-line method.The new machine has a purchase price of $1,175,000, an estimated useful life andMACRS class life of 5 years, and an estimated salvage value of $145,000. The applicabledepreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize onelectric power usage, labor, and repair costs, as well as to reduce the number of defectivebottles. In total, an annual savings of $255,000 will be realized if the new machine isinstalled. The company’s marginal tax rate is 35% and it has a 12% WACC.a. What initial cash outlay is…
Wildhorse Inc. wants to purchase a new machine for $38,790, 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 Wildhorse Inc. expects to sell it for that amount. The new machine will decrease operating costs by $9,000 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 PV table. (a) Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.) Cash payback period (b) years 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.) Internal rate of return %
Builtrite is considering purchasing a new machine that would cost $70,000 and the machine would be depreciated (straight line) down to $0 over its five year life. At the end of four years it is believed that the machine could be sold for $18,000. The current machine being used was purchased 3 years ago at a cost of $40,000 and it is being depreciated down to zero over its 5 year life. The current machine's salvage value now is $20,000. The new machine would increase EBDT by $46,000 annually. Builtrite's marginal tax rate is 34%. What is the TCF associated with the purchase of this machine if it is sold at the end of year 4 (NOT year 5)? O $4,000 O $11,880 $16,640 O $18,000
Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $8,800 per year and will cut annual operating costs by $14,900.The system will cost $51,000 to purchase and install. This system is expected to have a 7 year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 21 percent and the required return is 12.4 percent. What is the NPV of purchasing the pressure cooker?

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