Question

A manufacturer is considering two alternative machine replacements. Machine 1 costs $1 million with an expected...

A manufacturer is considering two alternative machine replacements. Machine 1 costs $1 million with an expected life of 5-years and will generate after-tax cash flows of $350,000 a year. At the end of 5 years, the salvage value on Machine 1 is zero, but the company will be able to purchase another Machine 1 for a cost of $1.2 million. The replacement Machine 1 will generate after-tax cash flows of $375,000 a year for another 5 years. At that time its salvage value will also be zero. The manufacturer's second option is to buy Machine 2 at a cost of $1.5 million today. Machine 2 will produce after-tax cash flows of $400,000 a year for 10 years, and after 10 years it will have an after-tax salvage value of $100,000. The cost of capital for both machines is 12 percent.

  1. What is the NPV for both machine 1 and for machine 2?
  2. Which machine will have the highest NPV for the firm?
  3. Please explain how the selection of the machine with the highest NPV will increase the value of the firm.
  4. If the manufacturer chooses the machine that adds the most value to the firm, by how much will the company's value increase?
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

*Please rate thumbs up

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Company X is purchasing a $12 million machine. It will cost $1 million to transport and...
Company X is purchasing a $12 million machine. It will cost $1 million to transport and install the machine. The machine has a depreciable life of 3 years, it will be fully depreciated using straight-line depreciation, and will have no salvage value. The machine will generate incremental revenues of $5.00 million per year along with incremental costs of $4 million per year. Company X’s tax rate is 20%. What is the incremental free cash flows for Company X at time...
Daily Enterprises is purchasing a $ 10.3 million machine. It will cost $53,000 to transport and...
Daily Enterprises is purchasing a $ 10.3 million machine. It will cost $53,000 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 $4.2 million per year along with incremental costs of $1.3 million per year.​ Daily's marginal tax rate is 35%. You are forecasting incremental free cash flows for Daily Enterprises. What are the incremental free cash flows...
A pharmaceutical company is considering two alternative machines for its production line. Machine A has an...
A pharmaceutical company is considering two alternative machines for its production line. Machine A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Machine B has a life of 10 years, will cost $132 million, and will produce net cash flows of $25 million per year. The company plans to run the production line for 10 years. Inflation in operating costs, airplane costs, and fares is expected...
Company B considers investing in a machine that costs €120,000. The machine is expected to produce...
Company B considers investing in a machine that costs €120,000. The machine is expected to produce revenues of €100,000 per year. The cost of materials and labor needed to generate these revenues will total €25,000 per year and other cash expenses will be €25,000 per year, for the next five years. The machine will be depreciated on a straight-line basis over five years with a zero salvage value and is estimated to be sold for €20,000 Euros at the end...
Carter company’s machine costs $20,000 and is expected to have a 10-year life. It will depreciate...
Carter company’s machine costs $20,000 and is expected to have a 10-year life. It will depreciate straight-line over a 10-year life to a zero salvage value and it is expected to reduce the firm’s cash operating costs by $3,000 per year. If the firm is in the 50 percent marginal tax bracket, what estimated Year 1–n net cash flows will the machine generate?
Daily Enterprises is purchasing a $10.31 million machine. It will cost $66,186.00 to transport and install...
Daily Enterprises is purchasing a $10.31 million machine. It will cost $66,186.00 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 $4.60 million per year along with incremental costs of $1.35 million per year. Daily’s marginal tax rate is 37.00%. The cost of capital for the firm is 14.00%. (answer in dollars..so convert millions to dollars) The...
A firm is considering an investment in a new machine with a price of $15.6 million...
A firm is considering an investment in a new machine with a price of $15.6 million to replace its existing machine. The current machine has a book value of $5.4 million and a market value of $4.1 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.3 million in...
Bob the Builder Inc is investing in a project and is purchasing a $7 million machine....
Bob the Builder Inc is investing in a project and is purchasing a $7 million machine. It will cost $1 million to transport and install the machine. The machine has a depreciable life of 3 years, it will be fully depreciated using straight-line depreciation, and will have no salvage value. For each of the next 4 years, the machine will generate incremental revenues of $7 million per year along with incremental costs of $5 million per year. The company’s tax...
15. Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected...
15. Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $29 million per year. Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of $24 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be...
Weir Inc. is considering to purchase of new production machine for $100,000. although the purchase of...
Weir Inc. is considering to purchase of new production machine for $100,000. although the purchase of this machine will not produce ny increase in sales revenues , it will result in a reduction of labor costs by $31,000 per year. the shipping cost is is $7,000. in addition it would cost $3,000 to install this machine properly. also because this machine is extremely efficient its purchase would necessitate an increase in inventory of $25,000. this machine has an expected life...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT