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Comparing Mutually Exclusive Projects Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,100,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $204,000 per year. Machine B costs $6,100,000 and will last for nine years. Variable costs for this machine are 30 percent and fixed costs are $165,000 per year. The sales for each machine will be $13.5 million per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be
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Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.arrow_forwardThe Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?arrow_forwardGina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?arrow_forward
- Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,140,000 and will last for 6 years. Variable costs are 36 percent of sales, and fixed costs are $125,000 per year. Machine B costs $4,340,000 and will last for years. Variable costs for this machine are 31 percent of sales and fixed costs are $78,000 per year. The sales for each machine will be $8.68 million per year. The required return is 10 percent and the tax rate is 21 percent. Both machines will be depreciated on a straight-line basis. If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A? EAC $ -2,983,801.79 $ 3,873,398.21 $-12,995,234.69 $ -3,132,991.88 $ -2,834,611.70 If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B? EAC $ -2,886,934.04 $-15,401,580.02 $ 3,970,265.96 $ -3,031,280.74 $ -2,742,587.33arrow_forwardVandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,210,000 and will last for six years. Variable costs are 37 percent of sales, and fixed costs are $350,000 per year. Machine B costs $5,455,000 and will last for nine years. Variable costs for this machine are 32 percent of sales and fixed costs are $240,000 per year. The sales for each machine will be $12.4 million per year. The required return is 9 percent, and the tax rate is 24 percent. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis. Calculate the EAC for each machine. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Answer is complete but not entirely correct. System A $ -4,473,627.60 X System B $ -4,090,361.10arrow_forwardVandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $ 3,210,000 and will last for six years. Variable costs are 37 percent of sales, and fixed costs are $350,000 per year. Machine B costs $5,455,000 and will last for nine years. Variable costs for this machine are 32 percent of sales and fixed costs are $240,000 per year. The sales for each machine will be $12.4 million per year. The required return is 9 percent, and the tax rate is 24 percent. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis. Calculate the EAC for each machine.arrow_forward
- Jax Inc is considering the purchase of a new machine for the production of computers. Machine A costs $7,000,000 and will last for six years. Variable costs are 25% of sales, and fixed costs are $500,000 annually. Machine B costs $10,000,000 and will last for ten years. Variable costs for the machine are 15% of sales, and fixed costs are $750,000 annually. The sales for each machine will be $4,000,000 per year. The required rate of return is 9%, the tax rate is 21%, and both machines will be depreciated using straight-line depreciation with no salvage value. Calculate the equivalent annual annuity for Machine B. (Round to 2 decimals) What is the Net Present Value for Machine B? (round to 2 decimals)arrow_forwardJax Inc is considering the purchase of a new machine for the production of computers. Machine A costs $7,000,000 and will last for six years. Variable costs are 25% of sales, and fixed costs are $500,000 annually. Machine B costs $10,000,000 and will last for ten years. Variable costs for the machine are 15% of sales, and fixed costs are $750,000 annually. The sales for each machine will be $4,000,000 per year. The required rate of return is 9%, the tax rate is 21%, and both machines will be depreciated using straight-line depreciation with no salvage value. Calculate the equivalent annual annuity for Machine A. (Round to 2 decimals)arrow_forwardJax Inc is considering the purchase of a new machine for the production of computers. Machine A costs $7,000,000 and will last for six years. Variable costs are 25% of sales, and fixed costs are $500,000 annually. Machine B costs $10,000,000 and will last for ten years. Variable costs for the machine are 15% of sales, and fixed costs are $750,000 annually. The sales for each machine will be $4,000,000 per year. The required rate of return is 9%, the tax rate is 21%, and both machines will be depreciated using straight-line depreciation with no salvage value. Calculate the equivalent annual annuity for Machine A. (Round to 2 decimals) Show how this is done in excel. Please answer fast i give you upvote.arrow_forward
- Company XYZ is evaluating a project that generates revenue of $200,000 per year for 10 years. The variable costs are 60% of the revenue. Fixed costs are $15,000. The equipment cost is $150,000. There net working capital will increase by $10.000 which will be reset at the end of the project. The equipment will be depreciated under straight-line method. The equipment can be sold for $25,000 at the end of the project. The risk of the project is above the average risk. The company pays tax at 38%. The assets of the company financed by equity only. The company expected to pay $2.00 of dividend per share which grows at the rate of 4% per year forever. The current price of the stock is $28. The company makes below adjustments to adjust the risk of the projects: Rate of 2.5% more is required by the high risky projects. Low risky project should be evaluated at the rate less than the cost of capital. The required rate of return for such projects will be reduced by 1.5%. What is the profitability…arrow_forwardA company is considering the introduction of a new product line. The initial investmentrequired for this project is $620,000, and annual maintenance costs are anticipated to be$53,400. Annual operating costs will be $10.5 per unit, and each unit of product can be soldfor $76. If the MARR is 10% and the project has a life of 6 years.What is the minimum annual production level for which the project is economicallyviablearrow_forwardThe Geo-Star Manufacturing Company is considering a new investment in a punch-press machinethat will cost $100,000 and has an annual maintenance cost of $10,000. There is also an additionaloverhauling cost of $20,000 for the equipment onceevery four years. Assuming that this equipment willlast infinitely under these conditions, what is thecapitalized equivalent cost of this investment at aninterest rate of 10%?arrow_forward
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