Question: A firm believes it can generate an additional $250,000 per year in revenues for the next 5 years if it replaces existing equipment with new

A firm believes it can generate an additional $250,000 per year in revenues for the next 5 years if it replaces existing equipment with new equipment that costs $240,000. The firm expects to be able to sell the new equipment when it is finished using it (after 5 years) 10,000. The existing equipment has a book value of $20,000 and a market value of $12,000. Variable costs are expected to total 70% of revenue. The additional sales will require an initial investment in net working capital of $15,000, which is expected to be recovered at the end of the project (after 5 years). Assume the firm uses straight-line depreciation. The firm’s marginal tax rate is 30%. and its weighted-average cost of capital is 10%.

a) What is the required initial investment (at t = 0)?

b) At what discount rate will this project break even?

c) Should the firm purchase the new equipment? Be sure to justify your recommendation.

Step by Step Solution

★★★★★

3.52 Rating (165 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

A Computation of the required initial investment at t 0 Particulars Amount Initial investement 24000... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

68-B-C-F-C-B (1168).xlsx

300 KBs Excel File

Students Have Also Explored These Related Corporate Finance Questions!

k 9 Saved Barley Hopp, Inc., manufactures custom-ordered commemorative beer steins. Its standard cost information follows: Direct materials (clay) Direct labor Variable manufacturing overhead (based...

The Nutrex Corporation wants to calculate its weighted average cost of capital. Its target capital structure weights are 40 percent long-term debt and 60 percent common equity. The before-tax cost of...

The Less-Than-A-Dollar Store wants to be able to sell a certain cosmetic, but cannot convince the distributor that its clientele is really the right market for this product, so the distributor...

An economist has predicted that for the next 5 years, the United States will have an 8% annual inflation rate, followed by 5 years at a 6% inflation rate. This is equivalent to what average price...

Question #3 A firm believes it can generate an additional $3,000,000 per year in revenues for the next 10 years if it replaces existing equipment that is no longer usable with new equipment that...

Question #1 Consider the following potential investment, which has the same risk as the firm?s other projects: Time Cash Flow 0 -$95,000 1 $20,000 2 $24,000 3 $24,000 4 $24,000 5 $24,000 6 $32,000 a)...

Question #1 a) A firm has an asset with a market value of $20,000 and a book value of $30,000. If its marginal tax rate is 25%, what will the net proceeds from selling the asset be? b) A firm has an...

1) A firm believes it can generate an additional $2,000,000 per year in revenues for the next 5 years if it purchases a new piece of equipment for $1,000,000. The firm does not expect to be able to...

Question #1 A firm believes it can generate an additional $1,700,000 per year in revenues for the next 5 years (years 1-5) and $2,100,000 for the next 5 years after that (years 6-10) if it replaces...

Question #1 A firm believes it can generate an additional $2,200,000 per year in revenues for the next 5 years (years 1-5) and $2,500,000 for the next 5 years after that (years 6-10) if it replaces...

A firm believes it can generate an additional $2,200,000 per year in revenues for the next 5 years (years 1-5) and $2,500,000 for the next 5 years after that (years 6-10) if it replaces existing...

This chapter presents a number of proposals for suburban redesign. Which of them would be appropriate or useful for your community? Try drawing up a plan for the ideal design of your neighborhood.

Winnie purchased a new car for $54,000. She has determined that it straight line depreciates to zero over 10 years. When she purchased the car, she made an $8,000 down payment and financed the rest...

3.77 Solve for V 1 and V 2 in the circuit of Fig. 3.119 using PSpice or MultiSim . 21x V 502 V ww 5 A 202 12 2 A

Useful I data: Y = C/ C 1.4 Gas Molar mass- M-, kg/k mol Air 28.97 32 1.4 en Butane (C,H10) Nitrogen (N2) Methane (CH) 58 1.1 28 1.4 16 1.32 Universal gas constant = 8.314 kJ / kmol. K 1 bar = 100...

13- A reversible power cycle receives energy Qu from a reservoir at temperature TH and rejects Oc to a reservoir at temperature Tc. The work developed by the power cycle is used to rejects energy Ou...

12 - A power cycle operates between a reservoir at temperature T and a lower-temperature reservoir at 280 K. At steady state, the cycle develops 80 kW of power while rejecting 2000 kJ/min of energy...

11- Air enters a compressor operating at steady state with a pressure of 1 bar, a temperature of 20C, and a volumetric flow rate of 0.25 m'/s. The air velocity in the exit pipe is 210 m/s and the...

7-A well-insulated turbine operating at steady state is sketched in the figure. Steam enters at 3 MPa, 400C, with a volumetric flow rate (V = AC) of 85 m'/min. Some steam is extracted from the...

Reconsider the minimum cost flow problem formulated Prob. 9.6-4, Starting with the initial BF solution that corresponds to replacing the tractor every year, use the network simplex method yourself...

Inventory management? MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its operations...

How important are pension funds to the U. S. Economy? MINI CASE Southeast Tile Distributors Inc. is a building tile wholesaler that originated in Atlanta but is now considering expansion throughout...

Define the following pension fund terms: 1. Defined benefit plan 2. Defined contribution plan 3. Profit sharing plan 4. Cash balance plan 5. Vesting 6. Portability 7. Fully funded; over funded; under...

7. You just won a lottery that will pay you $2,500 a year for twenty years. The first payment will be sent to you at the end of the first year. If you can earn 8 percent on your money, what is your...

A local school board with 8 people needs to form a committee with three different responsibilities. How many ways can this committee be formed?

Correct? The 2011 and 2012 Balance Sheets for Jacob, Inc. contained the following enties: Jacob had materials purchases in 2011 of $1,970 and materials purchases in 2012 of $3,218. What did Jacob...