A company is considering replacing a project which will require the purchase of $1.4 million in...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A company is considering replacing a project which will require the purchase of $1.4 million in new equipment. The equipment will be depreciated straight line to a zero book value over the 7 year life of the project. The company expects to sell the equipment at the end of the project for 20% of its original cost. . The existing equipment of this project was purchased 3 years back for $700,000 and has been depreciated using 5 year MACRS schedule. This machine has a salvage value of $500,000 today. The machine has another 7 years useful life left, after which it can be sold for $50,000. Annual incremental cost saving from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%. Required: Should the company accept the project by replacing the existing equipment with the new one? Use NPV and IRR decision rule in making your decision. A company is considering replacing a project which will require the purchase of $1.4 million in new equipment. The equipment will be depreciated straight line to a zero book value over the 7 year life of the project. The company expects to sell the equipment at the end of the project for 20% of its original cost. . The existing equipment of this project was purchased 3 years back for $700,000 and has been depreciated using 5 year MACRS schedule. This machine has a salvage value of $500,000 today. The machine has another 7 years useful life left, after which it can be sold for $50,000. Annual incremental cost saving from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%. Required: Should the company accept the project by replacing the existing equipment with the new one? Use NPV and IRR decision rule in making your decision.
Expert Answer:
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt , Eugene F. Brigham
Posted Date:
Students also viewed these finance questions
-
How does the risk of this 2-stock portfolio compare with the risk of the individual stocks if they were held in isolation?
-
How does the risk of an LBO change over time? How can the impact of changing risk be incorporated into the valuation of the LBO?
-
How does the risk of short-term funds differ from that of long-term funds?
-
Information for Drone On Limited is shown below: Total fixed expenses are $100,000 per month, and Drone On Limited is selling 1,000 drones per month. Required: 1. The marketing manager argues that a...
-
Which status related variableoccupation, education or incomeis the most appropriate segmentation base for: (a) expensive vacations, (b) opera subscriptions, (c) People magazine subscriptions, (d)...
-
A circular ring with area 4.45 cm2 is carrying a current of 12.5 A the ring is free to rotate about a diameter. The ring, initially at rest, is immersed in a region of uniform magnetic field given by...
-
Report writing is very time-consuming. What should be added to a trending database to quickly interrogate vibration data yet yield a quality report?
-
The partnership of Hendrick, Mitchum, and Redding has the following account balances: Cash . . . . . . . . . . . . . . . . . . . . . . $ 50,000 Noncash assets . . . . . . . . . . . . . . .135,000...
-
In the context of absorptive separation processes, how does the introduction of reactive absorption (e.g., using chemical reactants) alter the absorption equilibrium and kinetics? What are some...
-
Read the case study her vision of a model research center. You are to write an essay narrative that must include the following questions. What is it about Rachels leadership that clearly suggests...
-
Consider three products: coffee, cream, and Coffee Mate nondairy creamer. Suppose the price of cream goes up. What happens to the demand for the other two goods? (make your answer as complete as...
-
Anational catalog and the internet retailer has three warehouses and three major distribution centers located around the country. Normally, items are shipped directly from the warehouses to the...
-
How do adept writers adeptly navigate the delicate balance between formality and accessibility in their business correspondence, particularly when addressing stakeholders of varied educational...
-
What nuanced approaches can be employed to tailor business writing for diverse audiences with varying levels of linguistic acumen ? Explain
-
Laporte Engineering Company leased a machine on January 1, 2023, under a contract calling for four annual payments of $100000 on December 31, 2023 through 2026. The machine becomes the property of...
-
Shaw Company has the following account balances: Receivables Inventory Land Building-net Liabilities Common stock Additional paid-in capital Retained earnings $ 100,000 150,000 100,000 250,000...
-
One driver leaves Tampa for Atlanta (a distanc of 550 miles) at the same time as another driv leaves Atlanta for Tampa. The second driver travels at 1.2 times the first driver's speed. How many miles...
-
The Ferris wheel in the figure has a radius of 68 feet. The clearance between the wheel and the ground is 14 feet. The rectangular coordinate system shown has its origin on the ground directly below...
-
Absalom Motorss 14% coupon rate, semiannual payment, $1,000 par value bonds that mature in 30 years are callable 5 years from now at a price of $1,050. The bonds sell at a price of $1,353.54, and the...
-
Now suppose that Temp Forces earnings and dividends are expected to decline by a constant 6% per year foreverthat is, g = 6%. Why would anyone be willing to buy such a stock, and at what price should...
-
Assume that the risk-free rate is 5% and that the market risk premium is 6%. What is the required return on the market, on a stock with a beta of 1.0, and on a stock with a beta of 1.2?
-
Why are none of the bulbs in Figure 31. 24 lit? Data from Figure 31. 24 Figure 31.24 (1) (iii) NNN
-
In Figure 31. 25, identify the energy conversions that occur between points \(A\) and \(B, B\) and \(\mathrm{C}, \mathrm{C}\) and \(\mathrm{D}\), and \(\mathrm{D}\) and \(\mathrm{A}\). Data from...
-
In Figure 31. 26, bulb B is brighter than bulb C, which in turn is brighter than bulb A. Rank, largest first, \((a)\) the magnitudes of the potential differences across the bulbs, \((b)\) the...
Study smarter with the SolutionInn App