Question

Wickersham Corp. is contemplating the purchase of a machine that would improve the overall efficiency of the production process. Horton, the General Manager, believes that the new machine will:

Increase practical capacity by 10%, enabling Wickersham to produce 100 more units each month (for which demand is available). The product sells for $10 per unit.

Create $40,000 per year in variable operating expense savings, primarily through reduced electricity consumption and hazardous waste generation.

Require an annual inspection by the state environmental protection board to verify compliance with permits.

Each inspection costs $5,000. The new sales will increase accounts receivable balances by $1000 in the first year only. The savings in electricity and waste disposal will decrease accounts payable 10% of the realized savings in each of the first two years. All working capital changes will reverse at the end of the project. The new machine costs $80,000 and has a $10,000 salvage value at the end of Year 3. Wickersham Corp. will pay $5,000 to transport the machine to its facility and $10,000 to install it. Training costs will total $5,000. The company uses the straight-line method of depreciation. The company believes that it can gain reputation value for its improved environmental and community reputation due to less waste and estimates that the present value of such reputation improvements is $10,000. Wickersham Corp. has a weighted average cost of capital of 15% and a marginal income tax rate of 35%.

Should Wickersham Corp. purchase the machine? Why or why not?

Answer #1

Year | Investment cashflow | Increased in sales | Savings in operating expense | Annual inspection cost | Depreciation on machine | Total net before tax cashflow | Tax@35% | Net after tax cashflow | Add back depreciation to net after tax cashflow | After tax Discount factor@ 9.75% | Present value |

0 | -97000 | -97000 | 1 | -97000 | |||||||

1 | 5000 | 12000 | 40000 | -5000 | -30000 | 17000 | 5950 | 11050 | 41050 | 0.911162 | 37403.19 |

2 | -4000 | 12000 | 40000 | -5000 | -30000 | 17000 | 5950 | 11050 | 41050 | 0.830216 | 34080.35 |

3 | 12000 | 40000 | -5000 | -30000 | 17000 | 5950 | 11050 | 41050 | 0.756461 | 31052.71 | |

3 | 10000 | 10000 | 0.756461 | 7564.608 | |||||||

Net present value | 13100.87 | ||||||||||

Add : | Present value of reputation gained | 10000 | |||||||||

Total net present value | 23100.87 | ||||||||||

Wickersham Corp. should buy the machine as total net present value is postive |

DON Corp. is contemplating the purchase of a machine that will
produce cash savings of $27,000 per year for five years. At the end
of five years, the machine can be sold to realize cash flows of
$5,700. Interest is 12%. Assume the cash flows occur at the end of
each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1
and PVAD of $1) (Use appropriate factor(s) from the tables
provided.)
Required:
Calculate...

Please explain each step thoroughly
Redden-Bensimon Avionics Corp is considering the purchase of a
new machine which will reduce manufacturing and operating costs by
$5,000 annually and increase revenues by $6,000 annually.
Depreciation and taxes are excluded. Finance.com will use the MACRS
method to depreciate the machine, and it expects to sell the
machine at the end of its 5-year operating life for $10,000 before
taxes. The 5-year MACRS depreciation rates are 20%, 32%, 19%, 12%,
12%, and 5%. Finance.com's...

Renegade Industries is considering the purchase of a new machine
for the production of latex. Machine A costs $3.08 million and will
last for six years. Variable costs are 32% of sales, and fixed
costs are $2,096,978 per year. Machine B costs $5.06 million and
will last for nine years. Variable costs for this machine are 23%
of sales and fixed costs are $1,422,105 per year. The sales for
each machine will be $6.1 million per year. The required return...

Canal Company is contemplating the purchase of a new leather
sewing machine to replace the existing machine. The existing
machine was purchased four years ago at an installed cost of
$115,000; it was being depreciated under MACRS using a 5-year
recovery period. The existing machine is expected to have a useful
life of 5 more years. The new machine costs $203,000 and requires
$8,000 in installation costs; it has a five-year useable life and
would be depreciated under MACRS using...

10. Rickie’s Rickets is contemplating the purchase of a new
$330,000 ricket making machine. The system will be depreciated
straight-line to zero over the project’s five-year life. The pretax
resale value is $32,000. The system will save $126,000 before taxes
per year in costs and will increase working capital by $34,000 at
the beginning of the project. Working capital will revert back to
normal at the end of the project. If the tax rate is 35%, what is
the OCF...

Better Tires Corp. is planning to buy a new tire making
machine for $80,000 that would save it $40,000 per year in
production costs. The savings would be constant over the project's
3-year life. The machine is to be linearly depreciated to zero and
will have no resale value after 3 years.
The appropriate cost of capital for this project is 16% and
the tax rate is 21%.
Part 1
What is the free cash flow in each year of...

A company is evaluating the purchase of a machine to improve
product quality and output levels. The new machine would cost $1.4
million and would be depreciated for tax purposes using the
straight-line method over an estimated seven-year life to its
expected salvage value of $100,000. The new machine would require
an addition of $90,000 to working capital at the beginning of the
project, which will of course be returned to the firm at the end of
the project. In...

King’s Department Store is contemplating the purchase of a new
machine at a cost of $22,000. The machine will provide $3,500 per
year in cash flow for nine years. King’s has a cost of capital of
10%. Calculate NPV of the project.

XYZ corp. is considering investing in a new machine. The new
machine cost will $ 8,000 installed. Depreciation expense on the
new machine will be $ 1,200 per year for the next five years. At
the end of the fifth year XYZ expects to sell the machine for
$3000. XYZ will also sell its old machine today that has a book
value of $4000 for $4000. The old machine has depreciation expense
of $800 per year and zero salvage value....

VYS Inc will purchase a new machine that costs $30,000 and is
expected to last 12 years with a salvage value of $3,000. Annual
operating expenses for first year is $9,000 and increase by $200
each year thereafter. Annual income is expected to be $12,000 per
year. If VYS’s MARR is 10%, determine the NFW of the machine
purchase.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 12 minutes ago

asked 43 minutes ago

asked 53 minutes ago

asked 54 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago