Your firm spends $498,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firmconsiders forgoing these maintenance expenses for the next 3 years. If it does so, it expects it will need to spend $2.1million in year 4 replacing failed equipment.a. What is the IRR of the decision to forgo maintenance of the equipment?b. Does the IRR rule work for this decision?c. For what costs of capital (COC) is forgoing maintenance a good decision?a. What is the IRR of the decision to forgo maintenance of the equipment?The IRR of the decision is%. (Round to two decimal places.)

IRR refers to the internal rate of return at which the net present value is zero. It is the…

Answered: Your firm spends $498,000 per year in…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A factory has a flooding probability of 1% per year. When flooded, the factory will suffer 500,000 EUR in material damages. The existing insurance will certainly cover the material damages, a deductible of 20% will however apply. When flooded the factory will suffer another 500,000 EUR in opportunity cost of lost production time, which are not covered by insurance. A local plumbing firm has made an offer of installing a pump that would avoid this flooding and costs 5,000 EUR per year. Your boss asks you if this is a good idea? (assuming no recovery rate). a) Calculate Expected Loss p.a
A company plans to buy $ 11300 worth of metering devices. The machine, which has an economic life of 12 years and will not be used afterwards, should be put into maintenance at the end of a period of 2 years in order to be able to make good measurements. First maintenance cost $ 500 And each maintenance cost is twice the previous maintenance cost. There is no scrap value at the end of the machine's economic life. The company gains varying amounts every year due to the purchase of this machine. For the first three years, the earnings are $ 1000 each year. Annual earnings for each subsequent 3-year period increase by $ 1000 over the previous 3-year period. a) Draw the cash flow diagram and find the IIR value. b) If you managed the company, would you buy this machine when the MARR was 5% and explain why.
On January 1, 2021, X Company bought a machine for $44,000. It's now January 1, 2022, and management is disappointed that 2021 operating costs with the machine were $32,000. Since they are expecting future operating costs to continue to be $32,000 a year, they are considering replacing the machine with a new one. Although the new machine will cost $47,000, operating costs with the new machine will decrease by $8,000 each year. Both machines will last for 4 more years. The current machine can be sold immediately for $8,000 but will have no salvage value at the end of 4 years. The new machine will have a salvage value of $4,000 at the end of 4 years. Assuming a discount rate of 8%, what is the net present value of replacing the current machine with the new one? Submit Answer Tries 0/4
The management of Origami Company, a wholesale distributor of beachwear products, is considering purchasing a $30,000 machine that would reduce operating costs in its warehouse by $5,000 per year. At the end of the machine's eight-year useful life, it will have no scrap value. The company's required rate of return is 11%. (Ignore income taxes.) Required: 1. Determine the net present value of the investment in the machine. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign.) Net present value 2. What is the difference between the total undiscounted cash inflows and cash outflows over the entire life of the machine? Net cash flow
Your firm spends $800,000 per year (end of the year payment) in regular maintenance of its equipment. Due to the COVID-19 economic downturn, the firm considers forgoing these maintenance expenses for the next three years. If it does so, it expects it will need to spend $3 million in year 4 (end of the year payment) replacing failed equipment. Does the IRR rule work for this decision?, For what MARR is forgoing maintenance a good decision? a. IRR rule does not work, Positive NPW only if MARR >11.58% O b. IRR rule works, Positive NPW only if MARR> 11.58% O c. IRR rule works, Positive NPW only if MARR < 11.58% O d. IRR rule does not work, Positive NPW only if MARR < 11.58%
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Your firm spends $403,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firm considers forgoing these maintenance expenses for the next 3 years. If it does so, it expects it will need to spend $2.1 million in year 4 replacing failed equipment. a. What is the IRR of the decision to forgo maintenance of the equipment? b. Does the IRR rule work for this decision? c. For what costs of capital (COC) is forgoing maintenance a good decision? a. What is the IRR of the decision to forgo maintenance of the equipment? The IRR of the decision is%. (Round to two decimal places.)
Eastern Clothing Company is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Eastern's products and would reduce their pre-tax annual cash flows. What is the project's NPV? WACC Pre-tax cash flow reduction for other products (cannibalization) Investment cost (depreciable basis) Straight-line deprec. Per year Sales revenues, each year for 3 years Annual operating costs (excl. deprec.) Tax rate 10.00% $7,500 $90,000 $30,000 $75,000 $25,000 35.00%
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…
6. The Imperial Chemical Company is considering purchasing a chemical analysis machine worth $13,000. Although the purchase of this machine will not produce any increase in sales revenues, it will result in a reduction of labour costs. In order to operate the machine properly, it must be calibrated each year. The machine has an expected life of 6 years, after which it will have no salvage value. The following table summarizes the annual savings in labour cost and the annual maintenance costs in calibration over 6 years: Net Cash Flow ($) Costs ($) Year (n) 0 Savings ($) 13,000 -13,000 1 2,300 6,000 3,700 2 2,300 7,000 4,700 3 2,300 9,000 6,700 4 2,300 9,000 6,700 5 2,300 9,000 6,700 6 2,300 9,000 6,700 Find the internal rate of return for this project. [6]
A company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other products of the company and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) -$5,000 Investment cost (depreciable basis) $80,000 Straight-line depr. rate 33.333% Annual sales revenues $65,500 Annual operating costs (excl. depr.) -$25,000 Tax rate 35.0% Group of answer choices $ 684 $ 476 $ 595 $ 536 $…

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