An officer for a large construction company is feeling nervous. The anxiety is caused by a new excavator just released onto the market. The new excavator makes the one purchased by the company a year ago obsolete. As a result, the market value for the company’s excavator has dropped significantly, from $600,000 a year ago to $50,000 now. In ten years, it would be worth only $3,000. The new excavator costs only $950,000 and would increase operating revenues by $90,000 annually. The new equipment has a ten-year life and expected salvage value of $175,000. The tax rate is 35%, the CCA rate, 25% for both excavators, and the required rate of return for the company is 14%.

An officer for a large construction company is feeling nervous. The anxiety is caused by a new excavator just released onto the market. The new excavator makes the one purchased by the company a year ago obsolete. As a result, the market value for the company’s excavator has dropped significantly, from $600,000 a year ago to $50,000 now. In ten years, it would be worth only $3,000. The new excavator costs only $950,000 and would increase operating revenues by $90,000 annually. The new equipment has a ten-year life and expected salvage value of $175,000. The tax rate is 35%, the CCA rate, 25% for both excavators, and the required rate of return for the company is 14%.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 4P: Although the Chen Company’s milling machine is old, it is still in relatively good working order and...

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An officer for a large construction company is feeling nervous. The anxietyis caused by a new excavator just released onto the market. The newexcavator makes the one purchased by the company a year ago obsolete.As a result, the market value for the company’s excavator has droppedsignificantly, from $600,000 a year ago to $50,000 now. In ten years, itwould be worth only $3,000. The new excavator costs only $950,000 andwould increase operating revenues by $90,000 annually. The newequipment has a ten-year life and expected salvage value of $175,000. Thetax rate is 35%, the CCA rate, 25% for both excavators, and the requiredrate of return for the company is 14%. What is the NPV of the newexcavator? (Negative answer should be indicated by a minus sign. Do notround your intermediate calculations. Round the final answer to 2decimal places. Omit $ sign in your response.)NPV $
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Angelus Press is considering replacing all of its old cash registers with new ones. The old registers are fully depreciated and have no disposal value and will be sold for $ $50,000. The new registers cost $ 680,000. Because the new registers are more efficient than the old registers, Angelus Press will have annual cost savings from using the new registers in the amount of $140,000, for the first four years and then $ 100,000 for the remaining two years. The registers have a 6-year useful ife, and are depreciated using the straight line method with no disposal value. Angelus Press require a 12% real rate of return. Ignore income taxes Required: Calculate the Net present value and based on your answer state if project should a) be accepted Calculate the Payback period and based on your answer state if project should b) be accepted Calculate the Internal Rate of return and based on your answer state if project should be accepted c) Calculate the Accrual Rate of Return and based on your…
Garrett Boone, Bridgeport Enterprises’ vice president of operations, needs to replace an automatic lathe on the production line. The model he is considering has a sales price of $233,282 and will last for 15 years. It will have no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $24,000 per year. He also believes the lathe will reduce energy costs by $6,000 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,100.Click here to view the factor table.(a) Calculate the lathe’s internal rate of return. (Round answer to 0 decimal places, e.g. 25%.) Internal rate of return enter the internal rate of return in percentages rounded to 0 decimal places %
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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?
A manufacturer is considering replacing a production machine tool. The new machine, costing $40,000, would have a life of 5 years and no salvage value, but would save the firm $5000 per year in direct labor costs and $2000 per year in indirect labor costs. The existing machine tool was purchased 4 years ago at a cost of $40,000. It will last 5 more years and will have no salvage value. It could be sold now for $15,000 cash. Assume that money is worth 10% and that differences in taxes, insurance, and so forth are negligible. Use an annual cash flow analysis to determine whether the new machine should be purchased.
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