QUESTION 1-8:
The Everly Equipment Company purchased a machine 5 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $10,000 per year. If the machine is not replaced, it can be sold for $10,000 at the end of its useful life.
A new machine can be purchased for $160,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $50,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33%, 45%, 15%, and 7%.
The old machine can be sold today for $55,000. The firm’s tax rate is 35%, and the appropriate WACC is 15%.
1. If the new machine is purchased, what is the amount of the initial cash flow at Year 0?
$
2. What are the incremental net cash flows that will occur at the end of Years 1 through 5?
CF1
$
CF2
$
CF3
$
CF4
$
CF5
$
3. What is the NPV of this project? Round your answer to the nearest cent.
$
Should Everly replace the old machine?
-Select-YesNo
QUESTION 1-7:
St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earning before depreciation from $25,000 to $50,000 per year. The new machine will cost $84,500, and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm’s WACC is 13%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one?
QUESTION 1-6:
The Taylor Toy Corporation currently uses an injection-molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,400, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,400/6=$400 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life.
Taylor is offered a replacement machine that has a cost of $7,800, an estimated useful life of 6 years, and an estimated salvage value of $780. This machine falls into the MACRS 5-years class, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine would permit an output expansion, so sales would rise by $1,000 per year; even so, the new machine’s much greater efficiency would reduce operating expenses 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. Taylor’s marginal federal-plus-state tax rate is 40%, and its WACC is 12%. Should it replace the old machine?
QUESTION 1-5:
The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $106,000, and it would cost another $92,000 to modify it for special use. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $68,000. The machine would require an increase in net working capital (inventory) of $6,500. The milling machine would have no effect on revenues, but it is expected to save the firm $41,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 30%.
1. What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year 0 net cash flow?)
$
2. What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
3. What is the additional Year 3 cash flow (that is, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar.
4. If the project’s cost of capital is 15 %, should the machine be purchased?
QUESTION 1-4:
The Chen Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has both a book value and a market value of zero; it is in good working order, however, and will last physically for at least another 10 years. The proposed replacement machine will perform the operation so much more efficiently that Chen’s engineers estimate it will produce after-tax cash flows (labor savings and depreciation) of $8,300 per year. The new machine will cost $42,000 delivered and installed, and its economic life is estimated to be 10 years. It has zero salvage value. The firm’s WACC is 12%, and its marginal tax rate is 35%.
Should Chen buy the new machine?
QUESTION 1-3:
Allen Air Lines is now in the terminal year of a project. The equipment originally cost $12 million, of which 80% has been depreciated. Carter can sell the used equipment today to another airline for $4.2 million, and its tax rate is 40%. What is the equipment’s after-tax net salvage value?
QUESTION 1-2:
Cairn Communications is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information:
Projected sales
$5 million
Operating costs (not including depreciation)
3.5 million
Depreciation
1 million
Interest expense
1 million
The company faces a 35% tax rate. What is the project’s operating cash flow for the first year (t = 1)?
QUESTION 1-1:
Talbot Industries is considering an expansion project. The necessary equipment could be purchased for $16 million, and the project would also require an initial $2 million investment in net operating working capital. The company’s tax rate is 40%.
1. What is the initial investment outlay?
$
2. The company spent and expensed $50,000 on research related to the project last year. Would this change your answer?