Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 6, Problem 37QAP
a.
Summary Introduction
Adequate information:
Cost of new computer = $580,000
Useful life of new computer = 5 years
Pre-tax salvage value of new computer = $130,000
Saving in operating cost of new computer = $85,000
Cost of old computer = $450,000
Depreciation on the old computer per year = 90,000
Sale value of old computer = $230,000
Pre-tax salvage value of old computer = $60,000
Discount rate, r = 14% or 0.14
Tax rate = 21% or 0.21
To compute: Whether to replace the old computer and invest in the new computer.
Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.
b.
Summary Introduction
Adequate information:
Cost of new computer = $580,000
Useful life of new computer = 5 years
Pre-tax salvage value of new computer = $130,000
Saving in operating cost of new computer = $85,000
Cost of old computer = $450,000
Depreciation on the old computer per year = 90,000
Sale value of old computer = $230,000
Pre-tax salvage value of old computer = $60,000
Discount rate, r = 14% or 0.14
Tax rate = 21% or 0.21
To compute:
- The relevant cash flows
- Whether to replace the old computer and invest in the new computer.
Introduction:
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Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1.4 million; the new one will cost $1.7 million. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $325,000 after five years.
The old computer is being depreciated at a rate of $281,000 per year. It will be completely written off in three years. If we don’t replace it now, we will have to replace it in two years. We can sell it now for $450,000; in two years, it will probably be worth $130,000. The new machine will save us $315,000 per year in operating costs. The tax rate is 22 percent, and the discount rate is 12 percent.
a-1.
Calculate the EAC for the old and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
a-2.
What is the NPV of the decision to…
Suppose we are thinking about replacing an old computer with a new one. The old one
cost us $1.4 million; the new one will cost $1.7 million. The new machine will be
depreciated straight-line to zero over its five-year life. It will probably be worth about
$325,000 after five years.
The old computer is being depreciated at a rate of $281,000 per year. It will be
completely written off in three years. If we don't replace it now, we will have to replace it
in two years. We can sell it now for $450,000; in two years, it will probably be worth
$130,000. The new machine will save us $315,000 per year in operating costs. The tax
rate is 22 percent, and the discount rate is 12 percent.
a-1. Calculate the EAC for the old and the new computer. (A negative answer should be
indicated by a minus sign. Do not round intermediate calculations and round
your answers to 2 decimal places, e.g., 32.16.)
a-2. What is the NPV of the decision to replace the computer now? (A negative answer
should be…
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,260,000; the new one will cost $1,520,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $260,000 after five years.
The old computer is being depreciated at a rate of $252,000 per year. It will be completely written off in three years. If we don’t replace it now, we will have to replace it in two years. We can sell it now for $380,000; in two years, it will probably be worth $116,000. The new machine will save us $286,000 per year in operating costs. The tax rate is 24 percent and the discount rate is 10 percent.
a.
Calculate the EAC for the old computer and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b.
What is the NPV of the decision to replace the computer now? (A…
Chapter 6 Solutions
Corporate Finance
Ch. 6 - Opportunity Cost In the context of capital...Ch. 6 - Prob. 2CQCh. 6 - Incremental Cash Flows Your company currently...Ch. 6 - Depreciation Given the choice, would a firm prefer...Ch. 6 - Prob. 5CQCh. 6 - Prob. 6CQCh. 6 - Equivalent Annual Cost When is EAC analysis...Ch. 6 - Prob. 8CQCh. 6 - Capital Budgeting Considerations A major college...Ch. 6 - To answer the next three questions, refer to the...
Ch. 6 - Prob. 11CQCh. 6 - To answer the next three questions, refer to the...Ch. 6 - Prob. 1QAPCh. 6 - Prob. 2QAPCh. 6 - Calculating Project NPV Down Under Boomerang,...Ch. 6 - Calculating Project Cash Flow from Assets In the...Ch. 6 - Prob. 5QAPCh. 6 - NPV and Bonus Depreciation In the previous...Ch. 6 - Prob. 7QAPCh. 6 - Prob. 8QAPCh. 6 - NPV and Bonus Depreciation In the previous...Ch. 6 - Calculating Salvage Value An asset used in a...Ch. 6 - Calculating NPV Thurston Petroleum is considering...Ch. 6 - Prob. 12QAPCh. 6 - Cost-Cutting Proposals Starset Machine Shop is...Ch. 6 - NPV and Bonus Depreciation In the previous...Ch. 6 - Prob. 15QAPCh. 6 - Prob. 16QAPCh. 6 - NPV and Bonus Depreciation Eggz, Inc., is...Ch. 6 - Prob. 18QAPCh. 6 - Prob. 19QAPCh. 6 - Prob. 20QAPCh. 6 - Prob. 21QAPCh. 6 - Prob. 22QAPCh. 6 - Prob. 23QAPCh. 6 - Prob. 24QAPCh. 6 - Prob. 25QAPCh. 6 - Prob. 26QAPCh. 6 - Prob. 27QAPCh. 6 - Prob. 28QAPCh. 6 - Prob. 29QAPCh. 6 - Prob. 30QAPCh. 6 - Prob. 31QAPCh. 6 - Prob. 32QAPCh. 6 - Prob. 33QAPCh. 6 - Prob. 34QAPCh. 6 - Prob. 35QAPCh. 6 - Prob. 36QAPCh. 6 - Prob. 37QAPCh. 6 - Prob. 38QAPCh. 6 - Prob. 39QAPCh. 6 - Prob. 40QAPCh. 6 - Prob. 41QAPCh. 6 - Prob. 42QAPCh. 6 - Prob. 1MCCh. 6 - GOODWEEK TIRES, INC. After extensive research and...
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