Question

Tide company is planning to replace old machinery with new, more efficient equipment. The company spent...

Tide company is planning to replace old machinery with new, more efficient equipment. The company spent $100,000 on a market study months ago. The new machinery will cost $2,500,000 and has an estimated salvage value of $400,000. In order to make the machinery operatable, the Tide must pay $120,000 for shipping and $150,000 for training. With the anticipated growth due to the machinery replacement, Tide has to invest $90,000 in working capital. The machinery will be depreciated via the simplified straight-line depreciation method over its 25 year life. What is the annual depreciation expense?

  • $98,400
  • $102,400
  • $110,800
  • $84,000
  • $94,800

A company is evaluating an 8-year project that costs $200,000 and has annual net cash flows of $50,000 per year. The company’s cost of capital is 13%. What is the equivalent annual annuity of the project ?

  • $4,992
  • $8,323
  • $91,677
  • $41,677
  • $39,939
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

1. We have to take the cost of purchasing the new machinery which is a depreciable asset.

Cost of new machinery=$2,500,000

But the salvage value=$400,000

The original cost=$2500000-$400,000=$2,100,000

Annual depreciation charges=Cost/life of the machine=$2,100,000/25=$84,000 (Option d is correct)

2. Here first we have to find the NPV using NPV function in EXCEL

=NPV(rate,Year1 to Year8 cashflows)-Year0 cashflow

=NPV(13%,Year1 to Year8 cashflows)-200,000

NPV=$39,938.51

The equivalent annual annuity (EAA) has to be found by using PMT function in EXCEL

=PMT(rate,nper,pv,fv,0)

rate=13%

nper=8

pv=39938.51

fv=0

=PMT(13%,8,-39938.51,0)

PMT=$8323

EAA=$8323 (Option b is correct)

Cost of capital 13%
Cashflows
Year0 -200000
Year1 50000
Year2 50000
Year3 50000
Year4 50000
Year5 50000
Year6 50000
Year7 50000
Year8 50000
NPV 39938.51
EAA 8323
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
14: A firm is evaluating a new capital project. The firm spent $45,000 on a market...
14: A firm is evaluating a new capital project. The firm spent $45,000 on a market study and $30,000 on consulting three months ago. If the firm approves the project, it will spend $448,000 on new machinery, $15,000 on installation, and $5,000 on shipping. The machine will be depreciated via simplified straight-line depreciation over its 8-year life. The expected sales increase from this new project is $700,000 a year, and the expected incremental expenses are $250,000 a year. In order...
Samuel Manufacturing Inc. is evaluating new machinery in its factory. The machinery would replace existing equipment....
Samuel Manufacturing Inc. is evaluating new machinery in its factory. The machinery would replace existing equipment. The new machinery would cost $430,000, would last 6 years, and would have a salvage value of $36,000. The existing machinery currently has a net book value of $72,000 and could be sold for $65,000. If kept, the old machine would have a salvage value of $5,000 in 6 years time. The new machinery is expected to lower direct labour costs by $22,000 per...
The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment....
The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $12 million, is expected to last 9 years and has no salvage value. The existing equipment has a zero salvage value. The new machinery is expected to cut manufacturing costs from their current level of $7 per unit to $3. However, as the following table shows, there is uncertainty about future sales and unit costs. The opportunity cost of capital...
A company spent $45,000 on a market study and $30,000 on consulting 3 months ago. If...
A company spent $45,000 on a market study and $30,000 on consulting 3 months ago. If the company approves the project, it will spend $448,000 on new machinery, $15,000 on installation, and $5,000 on shipping. The machine will be depreciated through simplified straight-line depreciation over its 8-year life. The expected sales increase from this new project is $700,000 a year, and the expected incremental expenses are $250,000 a year. To start this new project, the company will invest $100,000 in...
A company is deciding on whether to replace some old equipment with new equipment. Which of...
A company is deciding on whether to replace some old equipment with new equipment. Which of the following is not a relevant cost for incremental analysis? Annual operating cost of the new equipment. Cost of the new equipment. Accumulated depreciation on the old equipment. Annual operating cost of the old equipment.
XYZ Company is considering whether a project requiring the purchase of new equipment is worth investing....
XYZ Company is considering whether a project requiring the purchase of new equipment is worth investing. The cost of a new machine is $340,000 including shipping and installation. The project will increase annual revenues by $400,000 and annual costs by $100,000. The machine will be depreciated via straight-line depreciation for three years to a salvage value of $40,000. If the firm does this project, $30,000 in net working capital will be required. What is the annual cash flow of this...
XYZ Company is considering whether a project requiring the purchase of new equipment is worth investing....
XYZ Company is considering whether a project requiring the purchase of new equipment is worth investing. The cost of a new machine is $340,000 including shipping and installation. The project will increase annual revenues by $400,000 and annual costs by $100,000. The machine will be depreciated via straight-line depreciation for three years to a salvage value of $40,000. If the firm does this project, $30,000 in net working capital will be required. What is the annual cash flow of this...
Rockyford Company must replace some machinery that has zero book value and a current market value...
Rockyford Company must replace some machinery that has zero book value and a current market value of $3,600. One possibility is to invest in new machinery costing $58,000. This new machinery would produce estimated annual pretax cash operating savings of $23,200. Assume the new machine will have a useful life of 4 years and depreciation of $14,500 each year for book and tax purposes. It will have no salvage value at the end of 4 years. The investment in this...
Rockyford Company must replace some machinery that has zero book value and a current market value...
Rockyford Company must replace some machinery that has zero book value and a current market value of $2,800. One possibility is to invest in new machinery costing $50,000. This new machinery would produce estimated annual pretax cash operating savings of $20,000. Assume the new machine will have a useful life of four years and depreciation of $12,500 each year for book and tax purposes. It will have no salvage value at the end of four years. The investment in this...
2. A German company is planning to replace the old machine for a new one. The...
2. A German company is planning to replace the old machine for a new one. The new machine will cost Euro 4 million, the old one can not be sold. The new machine will be used for 20 years, then it can be sold for 25% of the purchase price. Each year the company will save Euro 450,000 on the production costs, but the maintenance costs will be higher too: Euro 40,000 per year. In year 10, a special maintenance...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT