Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 12, Problem 18P
Filkins Fabric Company is considering the replacement of its old, fully
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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…
Steamboat Springs Furniture, Inc., is considering purchasing a new finishing lathe that costs $61,515.00. The lathe will generate revenues of $99,298.00 per year for five years. The cost of materials and labor needed to generate these revenues will total $50,526.00 per year, and other cash expenses will be $10,290.00 per year. The machine is expected to sell for $9,266.00 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Steamboat Springs' marginal tax rate is 36.00 percent, and its cost of capital is 14.00 percent.
What is the NPV of the project?
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’s 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?
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Chapter 12 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 12 - What types of projects require the least detailed...Ch. 12 - Prob. 3QCh. 12 - Prob. 4QCh. 12 - Prob. 5QCh. 12 - A project has an initial cost of 40,000, expected...Ch. 12 - IRR Refer to Problem 12-1. What is the projects...Ch. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6P
Ch. 12 - Your division is considering two investment...Ch. 12 - Edelman Engineering is considering including two...Ch. 12 - Prob. 9PCh. 12 - Project S has a cost of $10,000 and is expected to...Ch. 12 - Prob. 11PCh. 12 - After discovering a new gold vein in the Colorado...Ch. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - The Pinkerton Publishing Company is considering...Ch. 12 - Shao Airlines is considering the purchase of two...Ch. 12 - The Perez Company has the opportunity to invest in...Ch. 12 - Filkins Fabric Company is considering the...Ch. 12 - The Ulmer Uranium Company is deciding whether or...Ch. 12 - The Aubey Coffee Company is evaluating the...Ch. 12 - Your division is considering two investment...Ch. 12 - The Scampini Supplies Company recently purchased a...Ch. 12 - You have just graduated from the MBA program of a...Ch. 12 - Prob. 2MCCh. 12 - Define the term “net present value (NPV).” What is...Ch. 12 - Prob. 4MCCh. 12 - Prob. 5MCCh. 12 - What is the underlying cause of ranking conflicts...Ch. 12 - Prob. 7MCCh. 12 - Prob. 8MCCh. 12 - Prob. 9MCCh. 12 - Prob. 10MCCh. 12 - In an unrelated analysis, you have the opportunity...Ch. 12 - Prob. 12MC
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