Green Moose Industries is a company that produces iGadgets, among several other products. Suppose that Green Moose Industries considers replacing its old machine used to make iGadgets with a more efficient one, which would cost $1,800 and require $250 annually in operating costs except depreciation. After-tax salvage value of the old machine is $600, while its annual operating costs except depreciation are $1,100. Assume that, regardless of the age of the equipment, Green Moose Industries's sales revenues are fixed at $3,500 and depreciation on the old machine is $600. Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10%. Based on the data, net cash flows (NCFS) before replacement are $1,680 , and they are constant over four years. Although Green Moose Industries's NCFs before replacement are the same over the 4-year period, its NCFs after replacement vary annually. The following table shows depreciation rates over four years. Depreciation rates Year 1 Year 2 33.33% 44.45% Year 3 Year 4 14.81% 7.41% Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative. Year 0 Year 1 Year 2 Year 3 Year 4 New machine cost $1,800 After-tax salvage value, old machine $600 Sales revenues $3,500 Operating costs except depreciation $250 $3,500 $3,500 $250 $250 Operating income $ 2,650 $2,450 $3,500 $250 $2,983 $3,117 After-tax operating income 1,590 $1,470 $1,790 $1,870 Net cash flows after replacement (adding back depreciation) $ 2,190 $2,270 $1,790 $2,003 Incremental Cash Flows 1,200 $ 510 $590 $377 $323 Next evaluate the incremental cash flows by calculating the net present value (NPV), the internal rate of return (IRR), and the modified IRR (MIRR). Assume again that the cost of financing the new project is the same as the WACC and equals 10%. Hint: Use a spreadsheet program's functions or use a financial calculator for this task. NPV IRR MIRR Evaluation the IRR is positive the IRR is higher than WACC the MIRR is positive
Green Moose Industries is a company that produces iGadgets, among several other products. Suppose that Green Moose Industries considers replacing its old machine used to make iGadgets with a more efficient one, which would cost $1,800 and require $250 annually in operating costs except depreciation. After-tax salvage value of the old machine is $600, while its annual operating costs except depreciation are $1,100. Assume that, regardless of the age of the equipment, Green Moose Industries's sales revenues are fixed at $3,500 and depreciation on the old machine is $600. Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10%. Based on the data, net cash flows (NCFS) before replacement are $1,680 , and they are constant over four years. Although Green Moose Industries's NCFs before replacement are the same over the 4-year period, its NCFs after replacement vary annually. The following table shows depreciation rates over four years. Depreciation rates Year 1 Year 2 33.33% 44.45% Year 3 Year 4 14.81% 7.41% Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative. Year 0 Year 1 Year 2 Year 3 Year 4 New machine cost $1,800 After-tax salvage value, old machine $600 Sales revenues $3,500 Operating costs except depreciation $250 $3,500 $3,500 $250 $250 Operating income $ 2,650 $2,450 $3,500 $250 $2,983 $3,117 After-tax operating income 1,590 $1,470 $1,790 $1,870 Net cash flows after replacement (adding back depreciation) $ 2,190 $2,270 $1,790 $2,003 Incremental Cash Flows 1,200 $ 510 $590 $377 $323 Next evaluate the incremental cash flows by calculating the net present value (NPV), the internal rate of return (IRR), and the modified IRR (MIRR). Assume again that the cost of financing the new project is the same as the WACC and equals 10%. Hint: Use a spreadsheet program's functions or use a financial calculator for this task. NPV IRR MIRR Evaluation the IRR is positive the IRR is higher than WACC the MIRR is positive
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 17P: The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will...
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