Dorothy & George Company is planning to acquire a new machine at a total cost of $62,100. The machine's estimated life is 6 years and its estimated salvage value is $600. The company estimates that annual cash savings from using this machine will be $13,000. The company's after-tax cost of capital is 7% and its income tax rate is 40%. The company uses straight-line depreciation. (Use Appendix C, Table 1 and Appendix C, Table 2.) (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round answers to the nearest dollar amount.) Required: 1. What is this investment's net after-tax annual cash inflow? 2. Assume that the net after-tax annual cash inflow of this investment is $9,000; what is the net present value (NPV) of this investment? 3. What are the minimum net after-tax annual cost savings that make the proposed investment acceptable (i.e., the dollar cost savings that would yield an NPV of $0)? Hint: Redo the NPV analysis by setting the NPV equal to zero and making the annual after-tax cash flows equal to X; then solve for X and enter the amount as your answer. Also consider using Goal Seek in Excel. 1. 2. 3. > Answer is complete but not entirely correct. Net after-tax annual cash inflow Net present value Minimum net after-tax annual cost savings $ $ $ 11,900 18,801 X 12,944
Dorothy & George Company is planning to acquire a new machine at a total cost of $62,100. The machine's estimated life is 6 years and its estimated salvage value is $600. The company estimates that annual cash savings from using this machine will be $13,000. The company's after-tax cost of capital is 7% and its income tax rate is 40%. The company uses straight-line depreciation. (Use Appendix C, Table 1 and Appendix C, Table 2.) (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round answers to the nearest dollar amount.) Required: 1. What is this investment's net after-tax annual cash inflow? 2. Assume that the net after-tax annual cash inflow of this investment is $9,000; what is the net present value (NPV) of this investment? 3. What are the minimum net after-tax annual cost savings that make the proposed investment acceptable (i.e., the dollar cost savings that would yield an NPV of $0)? Hint: Redo the NPV analysis by setting the NPV equal to zero and making the annual after-tax cash flows equal to X; then solve for X and enter the amount as your answer. Also consider using Goal Seek in Excel. 1. 2. 3. > Answer is complete but not entirely correct. Net after-tax annual cash inflow Net present value Minimum net after-tax annual cost savings $ $ $ 11,900 18,801 X 12,944
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 20P
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Transcribed Image Text:Dorothy & George Company is planning to acquire a new machine at a
total cost of $62,100. The machine's estimated life is 6 years and its
estimated salvage value is $600. The company estimates that annual
cash savings from using this machine will be $13,000. The company's
after-tax cost of capital is 7% and its income tax rate is 40%. The
company uses straight-line depreciation. (Use Appendix C, Table 1
and Appendix C, Table 2.) (Do not round intermediate calculations.
Negative amounts should be indicated by a minus sign. Round
answers to the nearest dollar amount.)
Required:
1. What is this investment's net after-tax annual cash inflow?
2. Assume that the net after-tax annual cash inflow of this investment is
$9,000; what is the net present value (NPV) of this investment?
3. What are the minimum net after-tax annual cost savings that make
the proposed investment acceptable (i.e., the dollar cost savings that
would yield an NPV of $0)? Hint: Redo the NPV analysis by setting the
NPV equal to zero and making the annual after-tax cash flows equal to
X; then solve for X and enter the amount as your answer. Also
consider using Goal Seek in Excel.
1.
2.
3.
> Answer is complete but not entirely correct.
Net after-tax annual cash inflow
Net present value
Minimum net after-tax annual cost savings
$
$
$
11,900
18,801 x
12,944
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