Question

A company is considering replacement of manufacturing equipment with computer controlled equipment, at a cost of...

A company is considering replacement of manufacturing equipment with computer controlled equipment, at a cost of $500,000, replacing equipment with a scrap value of $50,000. This will reduce defect costs by $150,000 a year. At the end of 7 years, the equipment will be replaced and will have a scrap value of $100,000. The interest charges for financing the purchase will be $25,000 a year. The new system will be housed in a building that is currently unused, with an overhead value of $10,000 a year. Utility costs will be unchanged. Machine operators will require training of $1000 each for 4 workers. These workers are scheduled for a raise of $3000 each. Because the new equipment technology is well-established for its intended use, the risk premium for the project is considered to be 2 percentage points less than the company’s WACC of 8%.                 

1.1 List the investment facts for the project:

NOTE: List all of the financial details associated with the project and designate which should be included (and which ignored) in calculating the project’s cash flows and its cost of capital.

Life of the project: 7 years

Interest rate for the project:  6% (8-2) (cost of capital to the firm adjusted for project risk)

PVIF for the project:     0.666

PVIFA for the project:     5.582

A. Initial investment: (include all cash flows - positive and negative - that occur at the beginning of the project)

B. Future cash flows: (negative and positive)

C. Lump sum: (one time)

D. Annuity: (repeated annually)

E. Costs that you will ignore: (sunk cost or otherwise)

1.2. A. Using the relevant net cash flows and cost of capital from A above, calculate the NPV for the project. (use the NPV formula and the PV tables)

Please Answer:

1.1 A.

1.1 B.

1.1 C.

1.1 D

1.1 E.

1.2 A.

Homework Answers

Answer #1

1.1A: The intitial investment is

Machine expenses: $500,000; Scrap sale: $50,000

Hence initial invsetment = 500000-50000

                                       = $450,000

1.1B: The Cash flows are as shown below

1.1C: Lumpsum amount can be calculated by calculating the present values of all the cashflows of total shown above, WACC is 8%. So Calculating Present value of all above cash flows

The Lumpsum amount come $ 123,779.7

1.1D: The annuties can be counted are defect costs, interest cost, Overhead charge

= 150,000+25000+10000

= $185,000

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Company Q is considering a project which needs an equipment. The cost of the equipment is...
Company Q is considering a project which needs an equipment. The cost of the equipment is $350,000. This equipment will be depreciated for five years on a straight-line basis to zero-salvage value. The market value of the equipment at the end of the fifth year is $25,000. Initial investment in working capital is $22,000. Annual sales and operating costs (excluding depreciation) from this project are $175,000 and 93,000 respectively. Company pays tax at 40%. The annual operating cash flow from...
Q) Your corporation is considering replacing older equipment.  The old machine is fully depreciated and cost  $53,633.00  seven years...
Q) Your corporation is considering replacing older equipment.  The old machine is fully depreciated and cost  $53,633.00  seven years ago.  The old equipment currently has no market value. The new equipment cost $55,937.00 .  The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $14,087.00 .  The new equipment is expected to save the firm $15,718.00  annually by increasing efficiency and cost savings.  The...
Synlex Inc. is considering the purchase of a new machine for $600,000. It would cost $4,000...
Synlex Inc. is considering the purchase of a new machine for $600,000. It would cost $4,000 to install the machine. It would necessitate an increase of net working capital 120,000 at the initial time. It will result in an increase of sales revenue by $210,000 and an increase of maintenance cost by $40,000 per year. The machine has an expected life of 10 years, after which it will have salvage value of $50,000. Assume straight-line depreciation and the machine is...
Synlex Inc. is considering the purchase of a new machine for $600,000. It would cost $4,000...
Synlex Inc. is considering the purchase of a new machine for $600,000. It would cost $4,000 to install the machine. It would necessitate an increase of net working capital 120,000 at the initial time. It will result in an increase of sales revenue by $210,000 and an increase of maintenance cost by $40,000 per year. The machine has an expected life of 10 years, after which it will have salvage value of $50,000. Assume straight-line depreciation and the machine is...
Mary’s Apparel Company is considering manufacturing a new style of pants. The equipment to be used...
Mary’s Apparel Company is considering manufacturing a new style of pants. The equipment to be used costs $99,000 and would be depreciated to zero by the straight-line method over its 3-year life. It would have a zero salvage value, and no new working capital would be required. Annual revenues are $65,000 and annual operating costs are $25,000. Revenues and operating costs are expected to be constant over the project’s 3-year life. However, this project would compete with other existing products...
he Fleming Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated...
he Fleming Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 24 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 43,000 Sales revenue...
The company estimates that its cost of capital is 15%. It is considering whether to invest...
The company estimates that its cost of capital is 15%. It is considering whether to invest in Shining Zambian, which has the following cash flows and will make the decision on the basis of the Net present value of the project: Estimated Cash Flows of the Project of Shining Zambian Limited Year Cash flows in (K’ Millions) 0 (100,000) 1 50,000 2 30,000 3 70,000 4 20,000   Note: Zambians abroad investments hopes to recoup its investment and payback any amounts...
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated...
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 38 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 35,000 Sales revenue...
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated...
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 22 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4   Investment $ 26,500   Sales revenue...
The Freeman Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated...
The Freeman Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 35 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 32,000 Sales revenue...