Joley's department store has recently received the results of a study that suggests that potential sales...
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Joley's department store has recently received the results of a study that suggests that potential sales are being lost because many customers dislike having to use the elevator in Joley's and prefer to go across the street to Foske's department store, which has an escalator. Conse- quently, Joley's is considering the replacement of the elevator with a new escalator. The elevator was purchased 10 years ago for $140,000 and is being depreciated (straigit-line) to a salvage value of $40,000 10 years from now. It can be sold today for $80,000. The escalator can be purchased for $300,000 and would be depreciated (straight-line) to a salvage value of $100,000 in 10 years. In addition, Joley's anticipates that having an escalator rather than an elevator will increase sales by $20,000 annually and decrease operating expenses by $5,000 annually. Joley's has a marginal tax rate of 25%. [Parts (a), (b), and (c) are the same as Question 10-9. If you have already worked them out, you may use your solutions to answer parts (d) through (g) of this problem.] (a) What is the present book value of the elevator? (b) What is the initial cash outflow associated with the replacement of the elevator? Be sure to include any required changes in working capital. (c) What will be Joley's incremental change in annual cash flow if they replace the elevator? (d) What is the payback period for the replacement decision? (e) If Joley's uses a 12% discount rate to value projects, what is the NPV of the replacement decision? What is the PI at 12%? If Joley's uses a 16% discount rate to value projects, what is the NPV of the replacement decision? What is the PI at 16%? (g) What is the IRR of the replacement decision? (f) Joley's department store has recently received the results of a study that suggests that potential sales are being lost because many customers dislike having to use the elevator in Joley's and prefer to go across the street to Foske's department store, which has an escalator. Conse- quently, Joley's is considering the replacement of the elevator with a new escalator. The elevator was purchased 10 years ago for $140,000 and is being depreciated (straigit-line) to a salvage value of $40,000 10 years from now. It can be sold today for $80,000. The escalator can be purchased for $300,000 and would be depreciated (straight-line) to a salvage value of $100,000 in 10 years. In addition, Joley's anticipates that having an escalator rather than an elevator will increase sales by $20,000 annually and decrease operating expenses by $5,000 annually. Joley's has a marginal tax rate of 25%. [Parts (a), (b), and (c) are the same as Question 10-9. If you have already worked them out, you may use your solutions to answer parts (d) through (g) of this problem.] (a) What is the present book value of the elevator? (b) What is the initial cash outflow associated with the replacement of the elevator? Be sure to include any required changes in working capital. (c) What will be Joley's incremental change in annual cash flow if they replace the elevator? (d) What is the payback period for the replacement decision? (e) If Joley's uses a 12% discount rate to value projects, what is the NPV of the replacement decision? What is the PI at 12%? If Joley's uses a 16% discount rate to value projects, what is the NPV of the replacement decision? What is the PI at 16%? (g) What is the IRR of the replacement decision? (f)
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Answer rating: 100% (QA)
a What is the present book value of the elevator The present book value of the elevator can be calcu... View the full answer
Related Book For
Accounting
ISBN: 978-1118608227
9th edition
Authors: Lew Edwards, John Medlin, Keryn Chalmers, Andreas Hellmann, Claire Beattie, Jodie Maxfield, John Hoggett
Posted Date:
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