Nikul A $80,000 machine with a 10-year class life was purchased 5 years ago. The machine will now be soldfor $24,000 and replaced with a new machine costing $60,000, with a 5-year class life. The newmachine will not increase sales, but will decrease operating costs by $16,000 per year. Simplifiedstraight line depreciation is employed for both machines, and the marginal corporate tax rate is 34percent. What is the initial outlay for the project? NOTE-- ALTHOUGH THE INITIAL OUTLAY ISNEGATIVE, PLEASE ENTER YOUR ANSWER AS A POSITIVE SIGN. IN OTHER WORDS, IF YOURANSWER IS-10,000, ENTER IT AS 10,000. DO NOT ENTER THE DOLLAR SIGN.

In the capital budgeting initial outlay refers to the cash or expenses that are required to be…

Answered: A $80,000 machine with a 10-year class…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 3P

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Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost 17 million, and production and sales will require an initial 5 million investment in net operating working capital. The companys tax rate is 40%. a. What is the initial investment outlay? b. The company spent and expensed 150,000 on research related to the new product last year. Would this change your answer? Explain. c. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for 1.5 million after taxes and real estate commissions. How would this affect your answer?
A $73,000 machine with a 8-year class life was purchased 5 years ago. The machine will now be sold for $35,000 and replaced with a new machine costing $55,000, with a 5-year class life. The new machine will not increase sales, but will decrease operating gosts by $16,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the initial outlay for the project? NOTE-- ALTHOUGH THE INITIAL OUTLAY IS NEGATIVE, PLEASE ENTER YOUR ANSWER AS A POSITIVE SIGN. IN OTHER WORDS, IF YOUR ANSWER IS 10,000, ENTER IT AS 10,000. DO NOT ENTER THE DOLLAR SIGN.
A $85,000 machine with a 9-year class life was purchased 3 years ago. The machine will now be sold for $27,000 and replaced with a new machine costing $54,000, with a 5-year class life. The new machine will not increase sales, but will decrease operating costs by $16,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the initial outlay for the project? NOTE -- ALTHOUGH THE INITIAL OUTLAY IS NEGATIVE, PLEASE ENTER YOUR ANSWER AS A POSITIVE SIGN. IN OTHER WORDS, IF YOUR ANSWER IS -10,000, ENTER IT AS 10,000. DO NOT ENTER THE DOLLEAR SIGN.
A $76,000 machine with a 10-year class life was purchased 3 years ago. The machine will now be sold for $31,000 and replaced with a new machine costing $51,000, with a 5-year class life. The new machine will not increase sales, but will decrease operating costs by $ 16,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the initial outlay for the project? ALTHOUGH THE INITIAL OUTLAY IS NEGATIVE, PLEASE ENTER YOUR ANSWER AS A POSITIVE SIGN. IN OTHER WORDS, IF YOUR ANSWER IS-10,000, ENTER IT AS 10,000. DO NOT ENTER THE DOLLAR SIGN
A $69,000 machine with a 5-year class life was purchased 2 years ago. The machine will now be sold for $50,000 and replaced with a new machine costing $88,000, with a 10-year class life. The new machine will not increase sales, but will decrease operating costs by $3,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the incremental annual cash flow associated with the project?
Daily Enterprises is purchasing a $10.3 million machine. It will cost $54,000 to transport and install the machine. The machine has a depreciable life of five years using straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.3 million per year along with incremental costs of $1.3 million per year. Daily's marginal tax rate is 21%. You are forecastin incremental free cash flows for Daily Enterprises. What are the incremental free cash flows associated with the new machine? The free cash flow for year 0 will be $ (Round to the nearest dollar.)
Daily Enterprises is purchasing a $10.41 million machine. It will cost $65,217.00 to transport and install the machine. The machine has a depreciable life of five years using the straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.47 million per year along with incremental costs of $1.23 million per year. Daily's marginal tax rate is 35.00%. The cost of capital for the firm is 11.00%. (answer in dollars..so convert millions to dollars) The project will run for 5 years. What is the NPV of the project at the current cost of capital?
A $95, 000 machine with a 15-year class life was purchased 4 years ago. The machine will now be replaced with a new machine costing $68, 000, with an 8 - year class life. The new machine will not increase sales but will decrease operating costs by $25,750 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the incremental annual cash flow associated with the project in year 1 ? a) $116,575 b) $18,576 c) $19, 798 d) $17,732 e) $13,845.
The Quick Manufacturing Company, a large profitable corporation, may replace a production machine tool. A new machine would cost $37,000, have an 8-year useful life, and have no salvage value. For tax purposes, 3-year MACRS depreciation would be used. The existing machine tool cost $40,000 4 years ago, and it has been completely depreciated. The tool could be sold now to a used equipment dealer for $10,000 or be kept in service for another 8 years. It would then have no salvage value. The new machine tool would save about $9000 per year in operating costs compared to the existing machine. Assume a 20% combined state and federal tax rate. Compute the before-tax rate of return on the replacement proposal of installing the new machine rather than keeping the existing machine.

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