Tanaka Machine Shop is considering a four-yearproject to improve its production efficiency. Buyinga new machine press for $500,000 is estimated toresult in $205,000 in annual pretax cost savings.The press falls in the MACRS five-year class, and itwill have a salvage value at the end of the projectof $84,000. Refer to Table 8.3. The press alsorequires an initial investment in spare partsinventory of $23,000, along with an additional $2,800 in inventory for each succeeding year of theproject. The shop's tax rate is 23 percent and theproject's required return is 9 percent. Calculate theNPV of this project.

Calculate MACRS Depreciation:Using the MACRS depreciation table for a five-year class…

Answered: Tanaka Machine Shop is considering a…

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 5R

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Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
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?
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.
Garnette Corp is considering the purchase of a new machine that will cost $342,000 and provide the following cash flows over the next five years: $99,000, $88,000, $92,000. $87,000, and $72,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel. see Appendix C.
Geary Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $551,998 is estimated to result in $166,942 in annual pretax cost savings. The press falls in the MACRS five-year class (Refer to the MACRS table on page 277), and it will have a salvage value at the end of the project of $137,823. The press also requires an initial investment in spare parts inventory of $50,617, along with an additional $13,747 in inventory for each succeeding year of the project. If the shop's tax rate is 0.37 and its discount rate is 0.12, what is the total cash flow in year 4? (Do not round your intermediate calculations.) (Make sure you enter the number with the appropriate +/- sign)
Tanaka Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $430,000 is estimated to result in $170,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $73,000. Refer to Table 8.3. The press also requires an initial investment in spare parts inventory of $16,000, along with an additional $2,100 in inventory for each succeeding year of the project. The shop's tax rate is 24 percent and the project's required return is 10 percent. Calculate the NPV of this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Answer is complete but not entirely correct. $ 67,994.970 NPV
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Tanaka Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $415,000 is estimated to result in $163,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $63,000. (MACRS schedule) The press also requires an initial investment in spare parts inventory of $26,000, along with an additional $3,400 in inventory for each succeeding year of the project. The shop's tax rate is 21 percent and its discount rate is 8 percent. Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Should the company buy and install the machine press? ○ No Yes
Tanaka Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $415,000 is estimated to result in $154,000 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS schedule) and it will have a salvage value at the end of the project of $55,000. The press also requires an initial investment in spare parts inventory of $16,000, along with an additional $3,000 in inventory for each succeeding year of the project. The shop's tax rate is 25 percent and its discount rate is 12 percent. Calculate the project's NPV. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Net present value

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