MetaCori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $8,200 per year and will cut annual operating costs by $14,300. The system will cost $ 49,200 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 21 percent and the required return is 11.8 percent. What is the NPV of purchasing the pressure cooker?
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- Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
- Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and Machine 360-6, which has a cost of $360,000, a 6-year life, and after-tax cash flows of $98,300 per year. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Filkins’ cost of capital is 14%. Should the firm replace its old knitting machine? If so, which new machine should it use? By how much would the value of the company increase if it accepted the better machine? What is the equivalent annual annuity for each machine?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.Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
- Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $18,600 per year and will have variable costs of $1,700 per year. Fixed costs are $950. The system will cost $50,400 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 21 percent. Please provide a pro forma financial statement to Cash Flows from Operations for the life of the pressure cooker. PLEASE ANSWER THIS QUESTION IN EXCEL FORMULA, NOT ALGEBRAICALLY!Cor's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $10,100 per year and will cut annual operating costs by $11,750. The new system will also prompt a $4,900 increase in net working capital. The system will cost $60,200 to purchase and install. This system is expected to have a 4-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 21 percent and the required return is 10.5 percent. What is the NPV of purchasing the pressure cooker? OCF = $ CFO = S CF4=$ NPV = It It It It It 11 11Cori'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?
- 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 21 percent and the required return is 12.4 percent. What is the NPV of purchasing the pressure cooker?Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $7,900 per year and will cut annual operating costs by $14,000. The system will cost $48,300 to purchase and install. This system is expected to have a 6-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 21 percent and the required return is 11.5 percent. What is the NPV of purchasing the pressure cooker? Multiple Choice $30,900 -$5,834 ○ $4,909 о $34,134 -$20,096Corf's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $9,500 per year and will cut annual operating costs by $03.300. The system will cost $50100 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 40 percent and the required return is 30.8 percent. What is the NPV of purchasing the pressure cooker? Mutiple Choice O ● O $23,047 -40335 $5.603 -$2674 $6300
