A company is planning to augment itsproduction capacity through equipmentadditions that will cost $350,000. Thisaugmentation of capacity will result inincrease of costs by $150000 per year for 5years and also increases the gross incomeby $250,000 per year for the same period.For evaluating the project, the companyuses Straight line depreciation model fortaxation purpose, salvage value of $75,000and a life of 5 years. If the MARR is 30%and company's tax rate is 35%, basis totalcash flows is the capacity augmentationjustified (Investment tax credit and workingcapital to be neglected)

Additional cost (C) = $350000 Increase in income (x) = $250000 Increase in costs (y) = $150000 n = 5…

Answered: A company is planning to augment its…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 18E

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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?
After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend 900,000 for new mining equipment and pay 165,000 for its installation. The mined gold will net the firm an estimated 350,000 each year for the 5-year life of the vein. CTCs cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. a. What are the projects NPV and IRR? b. Should this project be undertaken if environmental impacts were not a consideration? c. How should environmental effects be considered when evaluating this or any other project? How might these concepts affect the decision in part b?
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?
A surface mount PCB placement/soldering line is to be installed for $1.6 million. It will have a salvage value of $100,000 after 5 years. Determine the depreciation deduction and the resulting unrecovered investment during each year of the asset’s life. Use declining balance depreciation with a rate that ensures the book value equals the salvage value.
Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase of land at a cost of $150,000. A new building will cost $120,000 and will be depreciated on a straight-line basis over 10 years to a salvage value of $0. Actual land salvage at the end of 10 years is expected to be $200,000. The actual building salvage at the end of 10 years is expected to be $190,000. Equipment for the facility is expected to cost $260,000. Installation costs will be an additional $20,000 and shipping costs will be $13,000. This equipment will be depreciated as a 7-year MACRS asset. Actual estimated salvage at the end of 10 years is $0. The project will require net working capital of $75,000 initially (year 0), an additional $40,000 at the end of year 1, and an additional $40,000 at the end of year 2. The project is expected to generate increased EBIT (operating income) for the firm of $110,000 during year 1. Annual EBIT is expected to grow at a rate…
Company Q is considering a project which needs an equipment. The cost of the equipment is $350,000. This equipment will be depreciated for five years on a straight-line basis to zero-salvage value. The market value of the equipment at the end of the fifth year is $25,000. Initial investment in working capital is $22,000. Annual sales and operating costs (excluding depreciation) from this project are $175,000 and 93,000 respectively. Company pays tax at 40%. The annual operating cash flow from this project is: a. $75,200 b. $64,000 c. $62,000 d. $77,200
Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase of land at a cost of $140,000. A new building will cost $140,000 and will be depreciated on a straight-line basis over 20 years to a salvage value of $0. Actual land salvage at the end of 20 years is expected to be $240,000. Actual building salvage at the end of 20 years is expected to be $180,000. Equipment for the facility is expected to cost $210,000. Installation costs will be an additional $40,000 and shipping costs will be $10,000. This equipment will be depreciated as a 7-year MACRS asset. Actual estimated salvage at the end of 20 years is $0. The project will require net working capital of $55,000 initially (year 0), an additional $50,000 at the end of year 1, and an additional $50,000 at the end of year 2. The project is expected to generate increased EBIT (operating income) for the firm of $120,000 during year 1. Annual EBIT is expected to grow at a rate of…
An investment is made with an expenditure of $150,000 at the start of the project. The income from the project at the end of each year for 5 years is $80,000, $90,000, $85,000, $70,000 and $60,000. The maintenance will cost 3000 $ for the first year and it increments by 2000$ from second year onwards. The salvage value is $65000. Draw a CFD for the project and give the analysis of the project based on the CFD.

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