ABC Company is trying to decide whether or not to automate their product packing process. The machine costs $200,000, has a useful life of 10 years and a salvage value $10,000. The machine costs $9000 per year to operate and maintain but will save the company $50,000 per year in labor costs. ABC Company has asked you to evaluate the economics of this purchase. (Assume their MARR is 14% per year).

ABC Company is trying to decide whether or not to automate their product packing process. The machine costs $200,000, has a useful life of 10 years and a salvage value $10,000. The machine costs $9000 per year to operate and maintain but will save the company $50,000 per year in labor costs. ABC Company has asked you to evaluate the economics of this purchase. (Assume their MARR is 14% per year).

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method. Complete the following table to compute the net present value (NPV) of the investment. (Hint: Remember that, in Year 10, Alliances also receives the salvage value of the machine.) Year Cash Flow PV Interest Factor at 14%…
Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two types of machines that would be appropriate are presently on the market. The company has determined the following: Machine A could be purchased for $22,000. It will last 10 years with annual maintenance costs of $800 per year. After 10 years the machine can be sold for $2,310. Machine B could be purchased for $20,000. It also will last 10 years and will require maintenance costs of $3,200 in year three, $4,000 in year six, and $4,800 in year eight. After 10 years, the machine will have no salvage value. Required: Assume an interest rate of 8% properly reflects the time value of money in this situation and that maintenance costs are paid at the end of each year. Ignore income tax considerations. Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase? Note: Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round…
Beryl's Iced Tea currently rents a bottling machine for $51,000 per year, including all maintenance expenses. It is considering purchasing a machine instead, and is comparing two options: a. Purchase the machine it is currently renting for $150,000. This machine will require $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $260,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $35,000 will be spent upfront training the new operators of the machine. Suppose the appropriate discount rate is 7% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The corporate tax rate is 30%. Should Beryl's Iced Tea continue…
Billy Bob's Crab & Oyster Shack wants to reduce the cost of labour by replacing some labour with machines. If Billy Bob's were to purchase a machine to shuck the oysters, it can save $50,000 a year for 10 years. The new machine will cost $650,000 and it will be worth $50,000 at the end of the 10 year period. The firm believes it will need $10,000 in spare parts inventory (increase in NWC), which it can sell for the $5,000 at the end of the project. The machine has a 20% CCA rate and the firm has a 15% tax rate. If they want a 20% return on their investment what is the NPV? Round your answer to the nearest dollar, no dollar sign, no commas, put negative sign if needed.
Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a fırst cost of $95,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Annual labor costs would increase $5,000 using the gang punch, but annual raw mnaterial costs would decrease $7,000. MARR is 6.25 %/year. Click here to access the TVM Factor Table Calculator Part a Your answer is incorrect. What is the present worth of this investment? $
Company is considering purchasing a breadmaker. The cost of the breadmaker is $200,000 and an additional $10,000 is required for installation and training expenses. The old equipment can be sold for $4000. Annual cash flows are $6,285 It is estimated the breadmaker will operate for 25 years Annual costs are expected to consist of $2500 for maintenance, 8,200 for depreciation, and 4,000 for electricity. The rate of return is 6%. The companies corporate tax rate is 25% and the present value of the tax shield for the breadmaker is $28000 Given all of this information, what would be the NPV of the breadmaker and should the company purchase it?
Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method.a. What is the net cash flow in year 0 (i.e., initial outlay)?b. What are the net cash flows after taxes in each of the next 10 years?c. What is the NPV of the investment?d. Should Alliance replace its existing drill press?
PT Tamaro has a plastic manufacturing machine. To increase its production capacity, PT Tamaro plans to buy a new machine at a price of 2,400 dollars and an installation of 100 dollars. This machine has an economic life of 5 years with no residual value. projected with this new machine can increase the level of sales to 2000 dollars per year. operational costs that must be borne by the company are the HPP of 40% of sales and $600 in overhead costs including $300 in depreciation costs. The current tax rate is 20% and the desired rate of return is 20%. Make an analysis whether PT Tamaro's plan to purchase this machine is feasible to implement. Use Discounted Payback Period and Net Present Value?
Ivanhoe Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck(not the least of which is that it runs). The new truck would cost $57,186. Because of the increased capacity, reduced maintenancecosts, and increased fuel economy, the new truck is expected to generate cost savings of $8,100. At the end of eight years, thecompany will sell the truck for an estimated $27,500. Traditionally, the company has used a general rule that it should not accept aproposal unless it has a payback period that is less than 50% of the asset's estimated useful life. Gary Smith, a new manager, hassuggested that the company should not rely only on the payback approach but should also use the net present value method whenevaluating new projects. The company's cost of capital is 8%.Calculate net present value and cash payback period
Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $46,000 and a remaining useful life of five years. It can be sold now for $56,000. Variable manufacturing costs are $43,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Purchase price Variable manufacturing costs per year Machine A $ 123,000 19,000 Machine B $136,000 15,000 (a) Compute the income increase or decrease from replacing the old machine with Machine A. (b) Compute the income increase or decrease from replacing the old machine with Machine B. (c) Should Lopez keep or replace its old machine? (d) If the machine should be replaced, which new machine should Lopez purchase? Complete this question by entering your answers in the tabs below. Req A Req B Req C and D Compute the income increase or decrease from replacing the old machine with Machine B. Note:…
Beryl's Iced Tea currently rents a bottling machine for $52,000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options: a. Purchase the machine it is currently renting for $150,000. This machine will require $25,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $250,000. This machine will require $16,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $39,000 will be spent up front to train the new operators of the machine. Suppose the appropriate discount rate is 7% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the cost of the rental machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The marginal corporate tax rate is 20%. Should Beryl's Iced…
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