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The Fleming Company, a food distributor, is considering replacing a filling line at its Oklahoma City warehouse. The existing line was purchased several years ago for $600,000. The line’s book value is $200,000, and Fleming management feels it could be sold at this time for $150,000. A new, increased capacity line can be purchased for $1,200,000. Delivery and installation of the new line are expected to cost an additional $100,000. Assuming Fleming’s marginal tax rate is 40%, calculate the net investment for the new line.
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- Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to service its east coast stores based on the following estimates: a. Determine the net present value of building the warehouse, assuming a construction cost of 20,000,000, an annual net cost savings of 4,000,000, and a desired rate of return of 14%. Use the present value tables provided in Appendix A. b. Determine the net present value of building the warehouse, assuming a construction cost of 25,000,000, an annual net cost savings of 2,500,000, and a desired rate of return of 14%. Use the present value tables provided in Appendix A. c. Interpret the results of parts (a) and (b).Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of increasing competition, Mallette is considering investing in an automated manufacturing system. Since competition is most keen for dishwashers, the production process for this line has been selected for initial evaluation. The automated system for the dishwasher line would replace an existing system (purchased one year ago for 6 million). Although the existing system will be fully depreciated in nine years, it is expected to last another 10 years. The automated system would also have a useful life of 10 years. The existing system is capable of producing 100,000 dishwashers per year. Sales and production data using the existing system are provided by the Accounting Department: All cash expenses with the exception of depreciation, which is 6 per unit. The existing equipment is being depreciated using straight-line with no salvage value considered. The automated system will cost 34 million to purchase, plus an estimated 20 million in software and implementation. (Assume that all investment outlays occur at the beginning of the first year.) If the automated equipment is purchased, the old equipment can be sold for 3 million. The automated system will require fewer parts for production and will produce with less waste. Because of this, the direct material cost per unit will be reduced by 25 percent. Automation will also require fewer support activities, and as a consequence, volume-related overhead will be reduced by 4 per unit and direct fixed overhead (other than depreciation) by 17 per unit. Direct labor is reduced by 60 percent. Assume, for simplicity, that the new investment will be depreciated on a pure straight-line basis for tax purposes with no salvage value. Ignore the half-life convention. The firms cost of capital is 12 percent, but management chooses to use 20 percent as the required rate of return for evaluation of investments. The combined federal and state tax rate is 40 percent. Required: 1. Compute the net present value for the old system and the automated system. Which system would the company choose? 2. Repeat the net present value analysis of Requirement 1, using 12 percent as the discount rate. 3. Upon seeing the projected sales for the old system, the marketing manager commented: Sales of 100,000 units per year cannot be maintained in the current competitive environment for more than one year unless we buy the automated system. The automated system will allow us to compete on the basis of quality and lead time. If we keep the old system, our sales will drop by 10,000 units per year. Repeat the net present value analysis, using this new information and a 12 percent discount rate. 4. An industrial engineer for Mallette noticed that salvage value for the automated equipment had not been included in the analysis. He estimated that the equipment could be sold for 4 million at the end of 10 years. He also estimated that the equipment of the old system would have no salvage value at the end of 10 years. Repeat the net present value analysis using this information, the information in Requirement 3, and a 12 percent discount rate. 5. Given the outcomes of the previous four requirements, comment on the importance of providing accurate inputs for assessing investments in automated manufacturing systems.The Fleming Company, a food distributor, is considering replacing a filling line at its Oklahoma City warehouse. The existing line was purchased several years ago for $3,600,000. The line’s book value is $445,000, and Fleming's management feels it could be sold at this time for $350,000. A new, increased capacity line can be purchased for $2,575,000 and will require and increase in NWC of $55,000. Delivery and installation of the new line are expected to cost $50,000 and 215,000 respectively. Assuming Fleming’s marginal tax rate is 35%, calculate the net investment for the new line.
- Pharoah 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 $56,640. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,000. At the end of eight years, the company will sell the truck for an estimated $27,700. Traditionally, the company has used a general rule that it should not accept a proposal unless it has a payback period that is less than 50% of the asset's estimated useful life. Brian Walker, a new manager. has suggested that the company should not rely only on the payback approach but should also use the net present value method when evaluating new projects. The company's cost of capital is 8%. Calculate the cash payback period and net present value of the proposed investment. (If the net present value is negative, use either a negative sign…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 result 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? A flour mill is considering buying a new jumbo sifter, which would have an installed cost of…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 result 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? Asnwer e) - g). Asnwer in Excel
- 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 result 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? Please answer a) - d). Asnwers in ExcelA 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 result 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? (please show how this could be solved using an Excel formula function)Linkin 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 $56,000. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,000. At the end of 8 years, the company will sell the truck for an estimated $27,000. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset’s estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company’s cost of capital is 8%.
- Linkin 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 $57,000. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,500. At the end of 8 years, the company will sell the truck for an estimated $28,100. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset's estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company's cost of capital is 8%. Click here to view the factor table. (a) Compute the cash payback period and net present value of the proposed investment. (If the net present value is…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?
