A company is considering purchasing factory equipment that costs $327340 and is estimated to have no salvage value at the end of its5.6-year useful life. If the equipment is purchased, annual revenues are expected to be $150900 and annual operating expensesexclusive of depreciation expense are expected to be $25000. The straight-line method of depreciation would be used. The cashpayback period on the equipment is5.95 years.2.6 years.5.6 years.2.17 years.

The cash payback period is calculated as the time it takes for the cumulative net cash flows to…

Answered: A company is considering purchasing…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 17P

See similar textbooks

Similar questions

The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
Taos Productions bought a piece of equipment for $79,860 that will last for 5 years. The equipment will generate net operating cash flows of $20,000 per year and will have no salvage value at the end of its life. What is the internal rate of return?
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?
You are also considering another project that has a physical life of 3 years—that is, the machinery will be totally worn out after 3 years. However, if the project were terminated prior to the end of 3 years, the machinery would have a positive salvage value. Here are the project’s estimated cash flows: Using the 10% cost of capital, what is the project’s NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the project’s optimal (economic) life?
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?
Zhang Company is considering the purchase of a new machine. Its invoice price is $200,000, freightcharges are estimated to be $4,000, and installation costs are expected to be $6,000. Salvage value ofthe new machine is expected to be zero after a useful life of 4 years. Existing equipment could beretained and used for an additional 4 years if the new machine is not purchased. At that time, thesalvage value of the equipment would be zero. If the new machine is purchased now, the existingmachine would be scrapped. Zhang’s accountant, Victor Wang, has accumulated the following dataregarding annual sales and expenses with and without the new machine.Without the new machine, Zhang can sell 10,000 units of product annually at a per unit selling price of$100. If the new unit is purchased, the number of units produced and sold would increase by 25%, andthe selling price would remain the same.The new machine is faster than the old machine, and it is more efficient in its usage of materials.…
A company is considering purchasing factory equipment that costs $400000 and is estimated to have no salvage value at the end of its 5-year useful life. If the equipment is purchased, annual revenues are expected to be $162000, and annual operating expenses exclusive of depreciation expenses are expected to be $27000. The straight-line depreciation method would be used.if the equipment is purchased the annual rate of return expected on this equipment is 1)6.75 % 2)33.75% 3)27.50 % 4)40.50%
A company is considering purchasing a machine that costs $400,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expenses are expected to be $38,000. The straight-line method of depreciation would be used. The cash payback period on the machine is: Select one: a. 33.3 years b. 30 years c. 4.5 years d. 6.45 years e. 3.2 years f. 6
A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used.If the equipment is purchased, the annual rate of return expected on this equipment is Group of answer choices 7.5%. 15.0%. 40.0%. 20.0%.
The Mellow Machine Company is considering the addition of a computerized lathe to its equipment inventory. The initial cost of the equipment is P600,000, and the lathe is expected to have a useful life of five years and no salvage value. The cost savings and increased capacity attributable to the machine are estimated to generate increases in the firm’s annual cash inflows (before considering depreciation) of P180,000. The machine will be depreciated as follows for tax purposes: Year Depreciation 1 P200,000 2 266,700 3 88,860 4 44,440 Mellow is currently in the 40 percent tax bracket. A 10 percent after-tax rate of return is desired. (Round off your PV factors to 5 decimal places.) The total present value of the depreciation tax shield is:
The Mellow Machine Company is considering the addition of a computerized lathe to its equipment inventory. The initial cost of the equipment is P600,000, and the lathe is expected to have a useful life of five years and no salvage value. The cost savings and increased capacity attributable to the machine are estimated to generate increases in the firm’s annual cash inflows (before considering depreciation) of P180,000. The machine will be depreciated as follows for tax purposes: Year Depreciation 1 P200,000 2 266,700 3 88,860 4 44,440 Mellow is currently in the 40 percent tax bracket. A 10 percent after-tax rate of return is desired. (Round off your PV factors to 5 decimal places.) The total present value of the depreciation tax shield is: Group of answer choices P499,347 P299,609 P190,192 P199,739

SEE MORE QUESTIONS

Recommended textbooks for you

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Fundamentals Of Financial Management, Concise Edi…

Finance

ISBN:

9781337902571

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Intermediate Financial Management (MindTap Course…

Finance

ISBN:

9781337395083

Author:

Eugene F. Brigham, Phillip R. Daves

Publisher:

Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Fundamentals Of Financial Management, Concise Edi…

Finance

ISBN:

9781337902571

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Intermediate Financial Management (MindTap Course…

Finance

ISBN:

9781337395083

Author:

Eugene F. Brigham, Phillip R. Daves

Publisher:

Cengage Learning

Principles of Accounting Volume 2

Accounting

ISBN:

9781947172609

Author:

OpenStax

Publisher:

OpenStax College

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

SEE MORE TEXTBOOKS