Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Question
Chapter 17, Problem 2E
To determine
To describe:The reason for the machine to be purchased.
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Question 2:
A new bottle-capping machine costs $45 000, including $5 000 for installation. Operating and
maintenance costs are expected to be $3 000 for the first year, increasing by $ 1 000 each year
thereafter. The salvage value is calculated by straight-line depreciation where a value of 0 is assumed
at the end of the service life.
a) Construct a spreadsheet that computes the equivalent annual cost (EAC) for the bottle capper.
What is the economic life if the expected service life is 6, 7, 8, 9 or 10 years? Interest is 12%./
b) How sensitive is the economic life to the different length of service life? Construct a sensitivity
graph to illustrate this point.
A machine that costs $12,000 is expected to operate for 10 years. The estimated salvage value at the end of 10 years is
$0. The machine is expected to save the company $2,331 per year before taxes and depreciation. The company
depreciates its assets on a straight-line basis and has a marginal tax rate of 40 percent. The firm's cost of capital is 14
percent.
What is the internal rate of return (IRR) for the machine?
Based on the IRR criterion, should this machine be purchased?
A proposed cost-saving device has an installed cost of $570,000. It is in Class 8 (CCA rate = 20%) for CCA purposes. It will actually
function for five years, at which time it will have no value. There are no working capital consequences from the investment, and the tax
rate is 35%.
a. What must the pre-tax cost savings be for us to favour the investment? We require an 11% return. (Hint: This one is a variation on the
problem of setting a bid price.) (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $
sign in your response.)
Cost savings
$122332.17
b. Suppose the device will be worth $81,000 in salvage (before taxes). How does this change your answer? (Do not round your
Intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)
Cost savings
170855.86
Chapter 17 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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