A food company needs $800,000 to purchasea new machine which will be used to peelpotatoes. The system is expected to have an8-year service life. 180,000 per year will besaved in labor and materials. However, it willrequire additional costs over eight years. Theadditional cost is 42,000 in year one. Theseexpenses increase by 2% each year. Assuminga $20,000 salvage value at the end of yeareight and a MARR=12% per year, use theNPW method to check whether the project isjustifiable.Note: You must use (P/A1,g,i,N) formula whilefinding the present value of the geometricgradient series in Question 3. You would losepoints in case you take each cash flowindividually to time 0.

Present worth of geometric series = A*[1-(1+g)^n/(1+i)^n]/(i-g) Let us calculate this as follows:

Answered: a $20,000 salvage value at the end of…

a $20,000 salvage value at the end of year eight and a MARR=12% per year, use the NPW method to check whether the project is justifiable.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 19P

See similar textbooks

Related questions

Q: A new operations system requires an initial investment of $100,000 and will generate $70,000 in…

Q: Project A requires a $380,000 initial investment for new machinery with a five-year life and a…

A: Solution: Average investment = (Initial Investment + salvage value) / 2 = (380000 + 39000) / 2 =…

Q: Estimates for one of two process upgrades are as follows: First Cost = Php 40,000 Annual Cost = Php…

A: Annual worth is the net revenue from the investment annually. It is calculated using the discounting…

Q: Consider palletizer at a bottling plant that has a first cost of $134,338, has operating and…

A: Given data, Initial investment = $134,338 Operating and maintenance cots= $17,980 Net salvage value…

Q: Alternative X has a first cost of 19000 an annual operating cost of 3500 , and a salvage value of…

A: The Present worth analysis is used by discounting their cash flow at a single of point of time at…

Q: A surface mount PCB placement/soldering line is to be installed for $1.6 million. It will have a…

A: Depreciation: Depreciation is a method of reducing the capitalized cost of long-lived operating…

Q: what is the projects equivalent annual cost, or EAC?

Q: A project requires an initial investment of 45,000$, has a salvage value of 11,000$ after six years,…

A: Annual worth of project is the equivalent annual cost of initial investment less equivalent annual…

Q: e required investment cost of a new, large shopping center is $47 million. The salvage value of the…

A: The breakeven revenue is the revenue that is equal to annual operating and financing cost.

Q: $500,000 is invested in equipment having a salvage value equal to $500,000(0.80n) after n years of…

A: The frequency of replacements that will minimize EUAC is the optimum replacement interval . Minimum…

Q: An investment of P135 000.00 is being considered for a new lathe machine. Estimated economic life of…

A: The present value is the value of the sum received at time 0. It is the current value of the sum…

Q: A five-year project has an initial fixed asset investment of $280,000, an initial NWC investment of…

A: Equivalent Annual Cost (EAC) is the cost of owning an asset. It is used as an important tool for…

Q: A new municipal refuse-collection truck can be purchased for $84,000. Its expected useful life is…

A: Given: Cost of asset = -$84,000 Receipts = $18,000 MARR = 19% Year = 6

Q: Project A requires a $280,000 initial investment for new machinery with a five-year life and a…

A: The average rate of return: The accounting rate of return means the average return on the initial…

Q: An investment of 80,200 returned 20,000 per year over a five year useful life and then have a…

A: Capital budgeting is the process by which a corporation examines potential large projects or…

Q: A contractor estimates purchase of a new bulldozer will increase earnings $20,000 per year for each…

A: Increase in earning per year = $ 20,000 Period = 10 Years Increase in expenses = $ 2000 Annual…

Q: An investment of $20,000 for a new condenser is being considered. Estimated salvage value of the…

A: Capital budgeting is a technique that helps to analyze that which project is profitable and which…

Q: Investment Required Php 50,000,000 Salvage Value after 10 Years Gross Income Annual Operating Costs:…

A: Time Period = 10 Years Interest Rate = 15% Initial Investment PHP 5,00,00,000.00 Gross…

Q: Alternative X has a first cost of 22000 an annual operating cost of 4100 , and a salvage value of…

A: A method of capital budgeting that helps to evaluate the present worth of cash flow and a series of…

Q: A new piece of equipment has a first cost of $300,000 with no salvage value. It will generate annual…

A: Cost of equipment = $ 300000 Life = 10 Years Salvage value = 0 Annual depreciation = (Cost - Salvage…

Q: An injection molding system has a first cost of $175,000 and an annual operating cost of $95,000 in…

A: ESL means maximum life of the machinery up to which machine can provides positive cashflows. ESL is…

Q: Using a compound interest of 8%, find the equivalent uniform annual cost for a proposed machine that…

A: The yearly cost of owning and sustaining an asset is calculated by dividing the net present value of…

Q: A project is estimated to cost P110,000, last 8 years and have a P15,000 salvage value. The annual…

A: Net Present Value=(Present Value of Cash Inflows-Present Value of Cash Outflows)

Q: An asset which has a first cost of RM 40,000 is expected to have an annual operating cost of RM…

A: Data given: First cost =RM 40,000 Annual operating cost = RM 15,000 Rate=20%

Q: Two alternatives are being considered for installation. Which should be selected based on an…

A: Under Capital budgeting decision, when the life of alternative projects is not same, equivalent…

Q: One of two methods must be used to produce expansion anchors. Method A costs $80,000 initially and…

A: Given information is: Method A costs $80,000 initially and will have a $15,000 salvage value after 3…

Q: Determine the NPW, AW, FW and IRR of the following engineering project. • Initial Cost ($400,000) •…

A: The difference between the current value of cash inflows and outflows over a period of time is known…

Q: A crane costs P700,000 and whose salvage value is P50,000 after 10 years. A. Find the rate (%) of…

A: The calculation of rate of depreciation using Matheson's formula is shown hereunder : Cost of the…

Q: GIVEN: Project C requires $800,000 net initial investment for new machinery with a 8-year life and a…

A: Initial Investment on machine = $800,000 Salvage Value = $40,000 Useful Life = 8 Years Straight Line…

Q: A new machine costs $100,000 and is expected to last 10 years. At the end of 10 years, the salvage…

A: Calculation of depreciation percentage :- The straight line depreciation rate = 1/10 = 10% per…

Q: Alternative X has a first cost of $30,000, an operating cost of $9,000 per year, and a $5,000…

A: The present value of the annuity is the current worth of a cash flow series at a certain rate of…

Q: a. A new operating system for an existing machine is expected to cost $520,000 and have a useful…

A: We need to add back annual depreciation to after tac profits, so that we are able to determine the…

Q: An elective project is currently under review. It requires an initial investment of $116,000 for…

A: IRR is the Internal rate of return. It is that rate at which the NPV of a project is zero.

Q: A project yields annual benefits of 75,000 for 10 years with 0 salvage value. It is designed to have…

A: The benefit-cost ratio shows the relationship between the total benefit that arises from a project…

Q: Check whether the project is accepted or rejected and recommend the best project, MARR=6% and n=8…

A: We will solve the question using Payback period and Net Present Value (NPV) method. Payback period…

Q: A four-year project has an initial cost of $20 000, net annual cash inflows of $10 000, and a…

A: IRR (internal rate of return) It is a capital budgeting tool to decide whether the capital budget…

Q: Project A requires a $280,000 initial investment for new machinery with a five-year life and a…

A: Payback period: Payback period is the length of time in which an investment reaches its break-even…

Q: A project requires an initial investment of $45,000, has a salvage value of $12,000 after six years,…

A: capital recovery refers to the time when the amount initially invested would be returned through the…

Q: An injection molding system has a first cost of $200,000 and an annual operating cost of $69,000 in…

A: ESL refers to economic service life of the new equipment. To determine ESL, AW of the asset is…

Q: Alternative X has a first cost of 36000 an annual operating cost of 6900 , and a salvage value of…

A: A method of capital budgeting that helps to evaluate the present worth of cash flow and a series of…

Q: A cooling water pumping station at a manufacturing plant in N City cost $30,000,000 to construct,…

Q: $500,000 is invested in equipment having a negligible salvage value regardless of the number of…

A: Present value computes the existing value of future benefits by discounting future worth with a…

Q: How long will it take to recover an investment of $245,000 in enhanced CNC controls that include…

A: Break-Even is point where entity is neither earning profit nor incurring losses. It is point where…

Q: investment is ($ 350,000) with a (6) year life cycle. The operational o 0) and increased by ($…

A: We have to find present value of all and than we have annual benefits required.

Q: A machine cost 80,000 and the salvage value after 20 years is 20,000. Find the equivalent annual…

A: Concept. Equivalent annual worth cost is computed when net present value of cashflows are divided…

Q: An investment of $20,000 for a new condenser is being considered. Estimated salvage value of the…

A: The external rate of return (ERR) is the rate of return on a project on which any “excess” cash is…

Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

A food company needs $800,000 to purchase
a new machine which will be used to peel
potatoes. The system is expected to have an
8-year service life. 180,000 per year will be
saved in labor and materials. However, it will
require additional costs over eight years. The
additional cost is 42,000 in year one. These
expenses increase by 2% each year. Assuming
a $20,000 salvage value at the end of year
eight and a MARR=12% per year, use the
NPW method to check whether the project is
justifiable.
Note: You must use (P/A1,g,i,N) formula while
finding the present value of the geometric
gradient series in Question 3. You would lose
points in case you take each cash flow
individually to time 0.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

A restaurant is considering the purchase of new tables and chairs for their dining room with an initial investment cost of $515,000, and the restaurant expects an annual net cash flow of $103,000 per year. What is the payback period?
Consolidated Aluminum is considering the purchase of a new machine that will cost $308,000 and provide the following cash flows over the next five years: $88,000, 92,000, $91,000, $72,000, and $71,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel, see Appendix C.
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?
A grocery store is considering the purchase of a new refrigeration unit with an Initial Investment of $412,000, and the store expects a return of $100,000 in year one, $72000 in years two and three, $65,000 in years four and five, and $38,000 in year six and beyond, what is the payback period?
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?
The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
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?
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.