Backyard boys is considering the purchase of a new toy-making machine that will increase revenues by $50,000 a year and annual costs by $10,000. The new machine will replace an outdated machine with a current book vale of $10,000 but if scrapped now can only be sold for $6,000.The new machine will cost $100,000 with shipping and installation fees of $10,000. The machine will be
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- The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $71,000. The machine would replace an old piece of equipment that costs $18,000 per year to operate. The new machine would cost $8,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $26,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%) 1. Depreciation expense 2. Incremental net operating income 3. Initial investment 4.…arrow_forwardMarker’s Tattoo Studio wants to buy new laser therapy equipment. This new equipment would cost $300,000 to purchase and $20,000 to install. Marker’s estimates that this new equipment would yield incremental margins of $98,000 annually due to new client services. It would require incremental cash maintenance costs of $10,000 annually. Marker’s expects the life of this equipment to be 5 years. They estimate a terminal disposal value of $20,000. Marker’s has a 25% income tax rate and depreciates assets on a straight-line basis (to terminal value) for tax purposes. The required rate of return on investments is 10%.Suppose that the tax authorities are willing to let Marker’s depreciate the new equipment down to zero over its useful life. If Marker’s plans to liquidate the equipment in 5 years, should it take this option? Quantify the impact of this choice on the NPV of the new equipment.arrow_forwardKiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed is manufactured by Lollie Corporation. The machine can be used for 11 years and then sold for $16,000 at the end of its useful life. Lollie has presented Kiddy with the following options: 1. Buy machine. The machine could be purchased for $166,000 in cash. All maintenance costs, which approximate $11,000 per year, would be paid by Kiddy. 2. Lease machine. The machine could be leased for a 11-year period for an annual lease payment of $31,000 with the first payment due immediately. All maintenance costs will be paid for by the Lollie Corporation and the machine will revert back to Lollie at the end of the 11-year period. Required: Assuming that a 11% interest rate properly reflects the time value of money in this situation and that all maintenance costs are paid at the end of each year, determine which option Kiddy should choose. Ignore income tax considerations. Note:…arrow_forward
- Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $8,800 per year and will cut annual operating costs by $14,900. The system will cost $51,000 to purchase and install. This system is expected to have a 7-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 35 percent and the required return is 12.4 percent. What is the NPV of purchasing the pressure cooker?arrow_forwardA toy manufacturer is considering the installation of a new process machine for the toy manufacturing facility. The machine costs $350,000 installed. wi ll generate additional revenues of $120,000 per year and will save $50,000 per year in labor and material costs. The machine will be financed by a $250,000 bank loan repayable in three equal annual principal installments plus 9% interest on the outstanding balance. The machine will be depreciated by seven-year MACRS. The useful life of this processing machine is 10 years at which time it will be soldfor $20,000. The combined marginal tax rate is 40%.(a) Find the year-by-year after-tax cash flow for the project.(b) Compute the IRR for this investment.(c) At MARR= 18%, is this project economically justifiable?arrow_forwardYour firm needs a computerized tool lathe which cost $49000 and requires $119000 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 34 percent and a discount rate of 13 percent. Calculate the depreciation tax shield for this project. Work in excelarrow_forward
- A flour mill is considering buying a new jumbo sifter, which would have an installed cost of $80,000. The new one would replace the existing sifter that was purchased 3 years ago at an installed cost of $60,000. If the company moves forward with the replacement, it could sell the old sifter for $19,000. Purchasing the new sifter would resu in the company's current assets increasing by $10,000 and current liabilities increasing by $8,000. The company uses the 5-year MACRS table for depreciation and is taxed at 21%. a) What is the accumulated depreciation of the old sifter? b) What is the current book value of the old sifter? c) What is the amount of depreciation recapture/recovery? d) What is the tax on the sale of the old sifter? e) What are the after-tax proceeds from the sale of the old sifter? f) What is the change in Net Working Capital? g) What is the initial investment for the project?arrow_forwardKendra Company is considering replacing an old machine. The old machine was purchased for $100,700 and has a book value of $40,700 and should last four more years with no salvage value. The company believes that it could currently sell the old machine for $20,700. The new machine cost $80,700 and will have a 4-year life and a $10,700 salvage value. Currently, it costs $20,700 annually to operate the old machine. The new machine is more efficient and should reduce operating cost by 50%. Based on quantitative analysis, should Kendra Company replace the old machine?arrow_forwardA private gym is looking at a new set of sports equipment with an installed cost of $465,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sports equipment can be scrapped for (TIP: "scrapped for" = sold for) $61,000. The sports equipment will save the gym $143,000 per year in pretax operating costs, and the equipment requires an initial investment in net working capital of $27,000. If the tax rate is 22 percent and the discount rate is 10 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPVarrow_forward
- The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,000,000, and it would cost another $20,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $576,000. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $424,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%. Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. What is the Year-0 net cash flow? $ If the project's cost of capital is 11 %, what is the NPV of the project? $arrow_forwardA highway bridge is being considered for replacement. The new bridge would cost $X and would last for 20 years. Annual maintenance costs for the new bridge are estimated to be $24,000. People will be charged a toll of $0.25 per car to use the new bridge. Annual car traffic is estimated at 400,000 cars. The cost of collecting the toll consists of annual salaries for five collectors at $10,000 per collector. The existing bridge can be refurbished for $1,600,000 and would need to be replaced in 20 years. There would be additional refurbishing costs of $70,000 every five years and regular annual maintenance costs of $20,000 for the existing bridge. There would be no toll to use the refurbished bridge. If MARR is 12% per year, what is the maximum acceptable cost (X) of the new bridge? (11.2)(a) $1,943,594 (b) $2,018,641 (c) $1,652,425 (d) $1,570,122 (e) $2,156,209arrow_forwardThe Ocean City water park is considering the purchase of a new log flume ride. The cost to purchase the equipment is $8,000,000, and it will cost an additional $475,000 to have it installed. The equipment has an expected life of 6 years, and it will be depreciated using a MACRS 7-year class life. Management expects to run about 150 rides per day, with each ride averaging 35 riders. The season will last for 120 days per year. In the first year, the ticket price per rider is expected to be $5.25, and it will be increased by 4% per year. The variable cost per rider will be $1.65, and total fixed costs will be $525,000 per year. After six years, the ride will be dismantled at a cost of $245,000 and the parts will be sold for $600,000. The cost of capital is 8.5%, and its marginal tax rate is 25%. Calculate the NPV, IRR, and MIRR of the new equipment. Is the project acceptable?arrow_forward
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