In conducting an EVA analysis for year 2 for a newly introduced product line, Bethune, Inc., which manufactures preassembled blower packages and other water treatment components, determined the EVA to be $28,000. The company uses an after-tax interest rate of 14% and a Te of 23%. The initial investment capital required for the new product was $510,000 and all equipment is 3-year MACRS depreciated. Bethune's CEO knew that the gross income was $700,000, but he asked you to find out how much expense was associated with the new product line for year 2. The expenses associated with the new product line for year 2 is $

In conducting an EVA analysis for year 2 for a newly introduced product line, Bethune, Inc., which manufactures preassembled blower packages and other water treatment components, determined the EVA to be $28,000. The company uses an after-tax interest rate of 14% and a Te of 23%. The initial investment capital required for the new product was $510,000 and all equipment is 3-year MACRS depreciated. Bethune's CEO knew that the gross income was $700,000, but he asked you to find out how much expense was associated with the new product line for year 2. The expenses associated with the new product line for year 2 is $

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 18P

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In conducting an EVA analysis for year 2 for a newly introduced product line, Bethune, Inc., which manufactures preassembled blower packages and other water treatment components, determined the EVA to be $28,000. The company uses an after-tax interest rate of 14% and a Te of 29%. The initial investment capital required for the new product was $540,000 and all equipment is 3-year MACRS depreciated. Bethune’s CEO knew that the gross income was $700,000, but he asked you to find out how much expense was associated with the new product line for year 2. The expenses associated with the new product line for year 2 is $
Tuas Limited (“Tuas”) is considering to replace its existing air-conditioning system with an energy efficient centralised cooling system that is compliant with BCA Green Mark 2021 (“new cooling system”).Civil engineering costs to assess the feasibility of the new cooling system of $50,000 was incurred last month. Installing the new cooling system will cost $320,000, and maintenance expense of $25,000 per year is required. An initial investment in spare parts inventory of $12,000 is needed, which will be fully recovered at the end of its useful life of five years.Savings in utilities is estimated to be $150,000 per year for the next five years. Tuas adopts a policy of depreciating such equipment to zero net book value equally over five years. A salvage value of $20,000 is anticipated. Corporate tax rate is 17% and the discount rate is 10%. Solve the cash flow from assets for Years 0 to 5 (inclusive) relating to the new cooling system, and appraise whether Tuas should proceed with it.…
Tuas Limited (“Tuas”) is considering to replace its existing air-conditioning system with an energy efficient centralised cooling system that is compliant with BCA Green Mark 2021 (“new cooling system”).Civil engineering costs to assess the feasibility of the new cooling system of $50,000 was incurred last month. Installing the new cooling system will cost $320,000, and maintenance expense of $25,000 per year is required. An initial investment in spare parts inventory of $12,000 is needed, which will be fully recovered at the end of its useful life of five years.Savings in utilities is estimated to be $150,000 per year for the next five years. Tuas adopts a policy of depreciating such equipment to zero net book value equally over five years. A salvage value of $20,000 is anticipated. Corporate tax rate is 17% and the discount rate is 10%. Tuas is also considering the following five projects, and has $8M available to invest: see image Examine which projects Tuas should invest in and…
Bartlet Industries is considering a new product line and will need to replace older equipment with new equipment in order to manufacture the product. The new machine will cost $250,000 with an installation cost of $25,000, and will be depreciated using the five year MACRS depreciation schedule in the table in question 4. Bartlet also spent $25,000 for a market analysis to measure demand for the new product. The old machine is four years old, had an original depreciable base of $150,000 and is being depreciated using the same five year MACRS depreciation schedule. The machine is expected to be sold for $30,000. An investment in working capital totaled $20,000. Revenues are expected to be $250,000 in the first year, and grow by 5% each year of the project’s four year life. Fixed expenses are expected to be $45,000 per year and variable expenses will begin year 1 at $35,000 and grow with sales at 5% each year. The project is expected to last four years. After the fourth year, the…
Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight- line to zero over the 10-year life of the project. Projected total contribution margin is $1,121,000 and the anticipated annual EBIT is $222,000. Assume that the corporate tax rate (τ) is 35%. i) What is the degree of operating leverage for this project? ii) If sales fall by 10%, what is the impact on OCF?
Simplicity Investors, Inc. is a Wellington-based consulting company. The company is currentlyconsidering the purchase of a $385,000 automating machine with an economic life of five years.The machine will be fully depreciated over five years using the straight-line method. The retiredmachine is expected to have a market value of $30,000. During its service period, the machinewill replace two office employees whose combined annual salaries are $90,000. The machinealso will immediately lower the firm’s required net working capital by $70,000. This amountof net working capital will need to be restored once the machine is sold. The corporate tax rateis 22 percent. Is it worthwhile to buy the machine if the appropriate discount rate is 9%
Warren Company plans to open a new repair service center for one of its electronic products. The center requires an investment in depreciable assets costing $432,000. The assets will be depreciated on a straight-line basis, over four years, and have no expected salvage value. The annual income statement for the center is given below. Revenues $370,000 Less: Cash operating expenses (148,000) Depreciation (108,000) Income before income taxes $114,000 Less: Income taxes (@40%) 45,600 Net income $68,400 Required: 1. Using the income approach, calculate the after-tax cash flows.$fill in the blank 1 2. Using the decomposition approach, calculate the after-tax cash flows for each item of the income statement and show that the total is the same as the income approach. Enter cash expenses as negative amounts and noncash expenses as positive amounts. Revenue (after tax) $fill in the blank Cash expenses (after tax) fill in the blank Depreciation tax savings fill in…
Using the information in the following table , what is the depreciation expense per year created by the project? Dunaway Industries is evaluating the idea of expanding their production facility in Cobb County The CFO gathered the following data. Dunaway Industries spent $ 500,000 researching other sites for their expansion. The equipment needed for the expansion will cost $ 25,600,000 fully installed . The equipment will be depreciated over 20 years to a salvage value of $ 1,000,000 . Dunaway Industries uses straight -line depreciation . If Dunaway accepts the project , the company will sell the equipment for salvage value ( i.e.$ 1,000,000 ) at the end of the life of the project . If Dunaway Industries adds the new equipment , sales are expected to increase by 17,400,000 and costs are expected to increase by $ 10,000,000 . The appropriate tax rate for Dunaway Industries is 30% The capital of the firm includes 70% of equity and 30% of debt . Dunaway Industries recently issued a bond…
An engineer is working on the layout of a new research and experimentation facility. Two plant operators will be required. If, however, an additional $150,000 of instrumentation and remote controls were added, the plant could be run by a single operator. The total before-tax cost of each plant operator is projected to be $52,500 per year. The instrumentation and controls will be depreciated using the MACRS 5-year depreciation schedule.(a) Find the rate of return on the project, and the after tax payback period.(b) Based on a MARR of 15%, is this a desirable investment?
The Salalah Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The finance manager could estimate the Earning before Depreciation and Tax and the project managers were given the task of first finding the Cash flow after Tax (CFAT) and then understand if the project could be accepted or rejected. The equipment will need an initial investment of OMR 41400. The useful life of the equipment is 6 years. After 6 years it will have no salvage value. The cost of capital is 8% Earning before Depreciation and Tax are as follows : - Earnings Before Depreciation and Tax (OMR) Year 5 Year 1 Year 2 Year 3 Year 4 Year 6 14000 14000 16200 18400 20600 26800 Depreciation is calculated on a straight line method and the tax rate is 25%. Evaluate the Project on the basis of NPV and choose the option below? O NPV is negative and the project can be rejected O NPV is 34450 and the project can be accepted O NPV is 27269 and the project can be…
Saxon Products, Inc., is investigating the purchase of a robot for use on the company’s assembly line. Selected data relating to the robot are provided below: Cost of the robot $ 1,900,000 Installation and software $ 440,000 Annual savings in inventory carrying costs $ 229,000 Annual increase in power and maintenance costs $ 49,000 Salvage value in 5 years $ 78,000 Useful life 5 years In addition to the data above, engineering studies suggest that use of the robot will result in a savings of 30,000 direct labor-hours each year. The labor rate is $14 per hour. Also, the smoother work flow made possible by the use of automation will allow the company to reduce the amount of inventory on hand by $419,000. This inventory reduction will take place at the end of the first year of operation; the released funds will be available for use elsewhere in the company. Saxon Products has a 16% required rate of return. Click here to view Exhibit 12B-1 and…
Swagger Manufacturing Corporation (SMC) is planning to invest in new machinery to produce a new product line. The invoice price of the machinery is $320,000. It would require $10,000 in shipping expenses and $20,000 in installation costs. The machinery falls in MACRS 3-year class with depreciation rates of 33.33% for the first year, 44.45% for the second year, 14.81% for the third year, and 7.41% for the fourth year. SMC plans to use the new machinery for four years and it is expected to have a salvage value of $75,000 after four years of use. SMC expects the new machinery to generate sales of 1,500 units in the first year. Unit growth is expected to be 4% after the first year. The company estimates that the new product will sell for $225 per unit in the first year with a cost of $150 per unit, excluding depreciation. Management projects that both the sale price and the cost per unit will increase by 3% per year due to inflation. Net working capital is projected to be 15% of next…