Suppose that ABC Ltd is considering purchasing one of three new processing machines. Eithermachine would make it possible for the company to produce its products more efficiently.Estimates regarding each machine are provided below:Machine A$79,0007 yearsMachine B$110,0008 yearsMachine COriginal costEstimated lifeSalvage value$244,00010 years$30,000$58,500$18,500NilNil$ 60,000$ 35,000Estimated annual cash inflows$30,000Estimated annual cash outflows$ 7,000If the projects cannot be repeated, which machine should ABC Ltd choose based on the NPVcriteria at an 8% cost of capital?

Year Cash Flow Present Value = Cash Flow/ (1+Cost of Capital )^Year Working 0 -79000 -79000.00…

Answered: Suppose that ABC Ltd is considering…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 2TP: Austins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new...

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Gina 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?
Austins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high-tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled in order to complete this recommendation: According to the information, the project will last 10 years and require an initial investment of $800,000, depreciated with straight-line over the life of the project until the final value is zero. The firms tax rate is 30% and the required rate of return is 12%. You believe that the variable cost and sales volume may be as much as 10% higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board, Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation(s).
Suppose Francine Dunkelberg’s Sweets is considering investing in warehouse-management software that costs $550,000, has $75,000 residual value, and should lead to cost savings of $130,000 per year for its five-year life. In calculating the ARR, which of the following figures should be used as the equation’s denominator (average amount invested in the asset)? $275,000 $237,500 $625,000 $312,500
The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return? Annual net cash flows Average investment Machine A only Machine B only Machine C only O Machines A and B Machine A $ 50,000 250,000 Machine B $ 40,000 300,000 Machine $ 75,000 500,000
Suppose Francine Dunkelberg’s Sweets is considering investing in warehouse-management software that costs $550,000, has $75,000 residual value, and should lead to cost savings of $130,000 per year for its five-year life. In calculating the ARR, which of the following figures should be used as the equation’s denominator (average amount invested in the asset)? a. $275,000 b. $237,500 c. $625,000 d. $312,500
You are working for a company which wishes you to evaluate the economic feasibility of producing alloy wheels for the automobile market. The important financial parameters for the project are as follows:Capacity: 10,000 wheels per yearVariable Cost: R1,500 per wheelFixed Cost: R20 million per yearCapital Cost: R30 millionSalvage Value: 0Selling Price: R5,000 per wheelDepreciation Period: 10 years (straight-line depreciation)Tax Rate: 40%Interest Rate: 12% (payable on the capital loan; assume the capital itself is not repaid)Minimum Acceptable Rate of Return (MARR): 15%The plant will be constructed in one year, but you will need to borrow the full capital cost at the beginning of year one.Answer the following questions:A. What is the annual revenue?B. What is the annual tax payment?C. What is the NPV for the project?D. What is the IRR?E. Will the company agree to invest in this project? Why?
The Fence Company is setting up a new production line to create top rails. The relevant data for two alternatives are shown below. Flow Line Manufacturing Cell Installed Cost Expected Life Salvage Value Variable Cost per Top Rail Click here to access the TVM Factor Table Calculator $15,000 5 years $0 $6.00 $10,000 5 years $0 $7.00
Find the expected EUAW from the financial data provided in the table for new equipment. Because of the uncertainty of technology being used in this equipment, it has not been possible to get the initial cost accurately. The annual benefit, however, is estimated to be $25,000 with a possible equipment life of 5 years. The salvage value is expected to be 10% of the initial cost. MARR = 8%. First Cost, $ $60,000 $80,000 $100,000 $120,000 Probability 0.25 0.35 0.30 0.10 Choices: A. $3957 B. $2977 C. $4628 D. $5157 Determine the associated risk measure in this equipment investmest in terms of standard deviation. A. $6,123 B. $4437.80 C. $8,523 D. $4,923
A manufacturer of automated optical inspection devices is deciding on a project to increase the productivity of the manufacturing processes. The estimated costs for the two feasible alternatives being compared are shown below. Use the internal rate of return (IRR) method to determine which alternative should be selected if the analysis period is 8 years and the company's MARR is 4% per year. Alternative M N Initial costs $30,000 $45,000 Net annual cash flow $4,500 $7,000 Life in years 8 8 (a) IRR of base alternative = (b) IRR of incremental cash flow = (c) Choose Alternative
Give me right solution according to the question.... Help me urgenttttttttt Installing an automated production system costing $278,000 is initially expected to save Zia corporation $52,000 in expenses annually. If the system needs $5000 in operating and maintenance costs each year and has a salvage values of $25,000 at Year 10, what is the IRR of this system? If the company wants to earn at least 12% on all investments, should this system be purchased?
Assume that your company is planning to implement a new information system to improve its operations. For this purpose, the company top management is evaluating two information systems project proposals. The costs and benefits details for the two proposals are shown in the following tables. (The marginal value of money is 15% per year) Proposal A Year Costs Benefit 0 25000 0 15000 100000 2 6000 150000 3 7000 200000 Proposal B Year Costs Benefit 0 52000 0 16000 200000 2 8000 250000 3 11000 300000 Evaluate the two proposals and determine the better by using the following: 1. Payback 1 2. Net present value (NPV) 3. Return on investment (ROI)
Walden Industries is considering investing in production−management software that costs $620,000, has $60,000 residual value, and leads to cost savings of $2,310,000 per year over its five−year life. Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return. A. $340,000 B. $60,000 C. $680,000 D. $620,000

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