Question

**Based on the following:**

- The estimated purchase price for the equipment required to move the operation in-house would be $500,000. Additional net working capital to support production (in the form of cash used in Inventory, AR net of AP) would be needed in the amount of $25,000 per year starting in year 0 and through all 5 years of the project to support production.

- The current spending on this component (i.e. annual spend pool) is $875,000. The estimated cash flow savings of bringing the process in-house is 20% or annual savings of $175,000. This includes the additional labor and overhead costs required.

- Your company has access to a credit line and could borrow the funds at a rate of 6%.

- Finally, the equipment required is anticipated to have a somewhat short useful life, as a new wave of technology is on the horizon. Therefore, it is anticipated that the equipment will be sold after five years for $25,000. (i.e. the terminal value).

Your colleague from Engineering believes we use a higher Discount Rate because of the risk of this type of project. As such, she is recommending a 5-year project life and flat annual savings. She suggests that even though the equipment is brand new, the updated production process could have a negative impact on other parts of the overall manufacturing costs. She argues that, while it is difficult to quantify the potential negative impacts, to account for the risk, a 14% discount rate should be used.

Using the data presented above (and ignoring the extraneous information), for this profit and supply chain improvement project, calculate each of the following (where applicable): Show Calculations

o Nominal Payback

o Discounted Payback

o Net Present Value

o Internal Rate of Return

Answer #1

Nominal payback period=Total Initial investment/Undiscounted annual cash flows |

ie.525000/175000= |

3 |

yrs. |

Discounted payback period | ||||

Year | C/fs | PV F at 6% | PV at 6% | Cumulative discounted c/f |

0 | -525000 | 1 | -525000 | -525000 |

1 | 175000 | 0.94340 | 165094 | -359906 |

2 | 175000 | 0.89000 | 155749 | -204156 |

3 | 175000 | 0.83962 | 146933 | -57223 |

4 | 175000 | 0.79209 | 138616 | 81393 |

5 | 200000 | 0.74726 | 149452 | 230845 |

NPV= | 230845 | |||

Discounted payback=3+(57223/138616)= | ||||

3.41 | ||||

Years | ||||

NPV= | 230845 | |||

IRR= | 21% | |||

The estimated purchase price for the equipment required to move
the operation in-house would be $750,000. Additional net working
capital to support production (in the form of cash used in
Inventory, AR net of AP) would be needed in the amount of $35,000
per year starting in year 0 and through all years of the project to
support production as raw materials will be required in year o and
all years to run the new equipment and produce components to...

The company has been growing steadily over the past 5 years, and
the financials and future prospects look good. Your CEO has asked
you to run the numbers. After doing some digging into the business,
you have gathered information on the following:
The estimated purchase price for the equipment required to move
the operation in-house would be $750,000. Additional net working
capital to support production (in the form of cash used in
Inventory, AR net of AP) would be needed...

Case Analysis 2: The CEO of Dynamic Manufacturing was at a
conference and talked to a supplier about a new piece of equipment
for its production process that she believes will produce ongoing
cost savings. As the Operations Manager, your CEO has asked for
your perspective on whether or not to purchase the machinery. After
talking to the supplier and meeting with your Engineers and
Financial Analysts, you’ve gathered the following pieces of
data:
• Cost of Machine: $140,000
•...

ben is considering the purchase of new piece of equipment. the
cost savings from the equipment would result in an annual increase
in net income of $200000. the equipment will have an initial cost
of $1200000 and have an 8 year life. the salvage value of the
equipment is estimated to be $200000. the hurdle rate is 10%. what
is accounting rate of return? b) what is the payback period? c)
what is the net present value? d) what would...

As of January 1, 2018, Network Corporation will be purchasing
new equipment at a cost of $400,000 for a special 6 year production
contract. Network will need an additional $50,000 to cover working
capital needs. At the end of the project the working capital will
be released. The investment will generate annual cash inflows of
$90,000 for the life of the project. At the end of the project, it
is estimated that the equipment can be sold for $30,000. The...

Rapozo Corporation has provided the following information
concerning a capital budgeting project:
Investment required in equipment
$
492,000
Net annual operating cash inflow
$
248,000
Tax rate
30
%
After-tax discount rate
7
%
The expected life of the project and the equipment is 3 years
and the equipment has zero salvage value. The company uses
straight-line depreciation on all equipment and the depreciation
expense on the equipment would be $164,000 per year. Assume cash
flows occur at the end...

Taser Company has to purchase some new equipment. Two
manufacturers have provided the following information:
Equipment A
Equipment B
Initial costs
$67,500
$90,000
Estimated life
5 years
5 years
Annual savings
$22,500
$24,000
Because the company requires a present value analysis, the
following present value factors are furnished:
Period
Present Value of $1.00 @10%
Present Value of an Annuity of $1.00 @ 10%
1
0.90909
0.90909
2
0.82645
1.73554
3
0.75131
2.48685
4
0.68301
3.16987
5
0.62092
3.79079
Required:
a. ...

A
company is considering a project which will require the purchase of
$805,000 in new equipment. The company expects to sell the
equipment at the end of the project for 25% of its original cost,
but some assets will remain in the CCA class. Annual sales from
this project are estimated at $292,000. Initial net working capital
equal to 36.50% of sales will be required. All of the net working
capital will be recovered at the end of the project....

The Bramble Company is planning to purchase $487,000 of
equipment with an estimated 7-year life and no estimated salvage
value. The company has projected the following annual cash flows
for the investment: Year Projected Cash Flows 1 $207,000 2 132,000
3 109,000 4 51,700 5 61,200 6 44,400 7 46,300 Total $651,600 Click
here to view the factor table. Calculate the net present value of
the proposed equipment purchase. Bramble uses a 11% discount rate.
(For calculation purposes, use 4...

A
company is considering a project which will require the purchase of
$705,000 in new equipment. The company expects to sell the
equipment at the end of the project for 25% of its original cost,
but some assets will remain in the CCA class. Annual sales from
this project are estimated at $252,000. Initial net working capital
equal to 31.50% of sales will be required. All of the net working
capital will be recovered at the end of the project....

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 3 minutes ago

asked 4 minutes ago

asked 6 minutes ago

asked 6 minutes ago

asked 12 minutes ago

asked 30 minutes ago

asked 40 minutes ago

asked 46 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago