Question 17 Teagyn corp. produces PITAs and has a choice of upgrading or replacing a piece of equipment. The upgrade would cost $25M and have an operating cost per unit of $62,000. Replacing the equipment would cost $39M and would reduce operating costs per unit from the upgrade estimate by 10%. Replacing would also allow the current machine to be sold for $3M now. Regardless of the choice, Teagyn forecasts sales of 460 units at $80,000 per unit and expects unit sales to grow at 10% per year over the next four years (five years in total, selling price and costs would remain the same). Use a WACC of 12% and to compare these choices. What would the salvage (resale) value of the old machine be to change the decision on an NPV basis? Please consider the changes in steps of $100,000 (i.e. $1,100,000 to $1,200,000). Please enter your response with no units or commas and 1 decimal place in millions: "$2,110,000" would be "2.1" (note: NO units and use 5/4 rounding). Your Answer: Answer

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MKM International is seeking to purchase a new CNC ma-chine in order to reduce costs. Two alternative machines arein consideration. Machine 1 costs $500,000 but yields a 15 per-cent savings over the current machine used. Machine 2 costs$900,000 but yields a 25 percent savings over the current ma-chine used. In order to meet demand, the following forecastedcost information for the current machine is also provided.a. Based on the NPV of the cash flows for these five years,which machine should MKM International Purchase? As-sume a discount rate of 12 percent.b. If MKM International lowered its required discount rate to8 percent, what machine would it purchase?Year Projected Cost1 1,000,0002 1,350,0003 1,400,0004 1,450,0005 2,550,000

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Average rate of returnnew product Hana Inc. is considering an investment in new equipment that will be used to manufacture a smart-phone. The phone is expected to generate additional annual sales of 10,000 units at 300 per unit. The equipment has a cost of 4,500,000, residual value of 500,000, and a 10-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Determine the average rate of return on the equipment.

New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $1,080,000, and it would cost another $22,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the first 3 years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $380,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 35%. What is the Year-0 cash flow? What are the net operating cash flows in Years 1, 2, and 3? What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)? If the project’s cost of capital is 12%, should the machine be purchased?

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Applying Differential Analysis to Equipment Replacement Decision TaylorMade - Adidas Golf Company a subsidiary of Adidas, manufactures golf clubs using "adjustable weight technology" or AWT. Suppose a European machine company has proposed to sell TaylorMade a new highly automated machine that would reduce significantly the labor cost of producing its golf clubs. The cost of the machine is $ 7,800,000, and would have an expected life of six years, at the end of which it would have a residual value of 10% of its original cost. The machine has an estimated operating cost of $39,000 per month. The direct labor cost savings per club from using the machine is estimated to be $16 per club, per month. In addition, other fixed overhead costs of $20,800 per month would be eliminated if the new machine is purchased. Also, the new machine would free up about 13,000 square feet of space from the displaced workers. Assume TaylorMade's building is held under a 10-year lease that has eight years…