You have been asked to evaluate the proposed purchase of a new machine by your company....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You have been asked to evaluate the proposed purchase of a new machine by your company. The price of the new machine is £250,000, and it will cost an additional £25,000 to adapt it to the company's purpose. The company might try to sell the machine after five years, but it is very unlikely to get a meaningful (material) price. Depreciation is based on the straight-line method. Use of the machine would require an increase in net working capital of £15,000, which would be recovered in the final year of the investment. The machine is expected to save the firm £50,000 per year in operating costs. The corporate tax rate is 40%. Required a. What is the initial investment outlay associated with the machine purchase? b. What is the terminal cash flow in year five? c. Critically examine the treatment of working capital in the above case. d. If the project's required rate of return is 15%, should the equipment be purchased? e. Undertake a detailed critical evaluation of how your company could increase the NPV of the project by using debt finance. You have been asked to evaluate the proposed purchase of a new machine by your company. The price of the new machine is £250,000, and it will cost an additional £25,000 to adapt it to the company's purpose. The company might try to sell the machine after five years, but it is very unlikely to get a meaningful (material) price. Depreciation is based on the straight-line method. Use of the machine would require an increase in net working capital of £15,000, which would be recovered in the final year of the investment. The machine is expected to save the firm £50,000 per year in operating costs. The corporate tax rate is 40%. Required a. What is the initial investment outlay associated with the machine purchase? b. What is the terminal cash flow in year five? c. Critically examine the treatment of working capital in the above case. d. If the project's required rate of return is 15%, should the equipment be purchased? e. Undertake a detailed critical evaluation of how your company could increase the NPV of the project by using debt finance.
Expert Answer:
Answer rating: 100% (QA)
a The initial investment outlay associated with the machine purchase includes the cost of the machine 250000 the cost of adaptation 25000 and the increase in net working capital 15000 Therefore the in... View the full answer
Related Book For
Managerial Accounting
ISBN: 9781259275814
11th Canadian Edition
Authors: Ray H Garrison, Alan Webb, Theresa Libby
Posted Date:
Students also viewed these accounting questions
-
Case Study: Quick Fix Dental Practice Technology requirements Application must be built using Visual Studio 2019 or Visual Studio 2017, professional or enterprise. The community edition is not...
-
You have been asked to evaluate the following investment opportunity. A small firm is available for purchase at an initial cost of $150,000, to be paid to the current owner in equal installments over...
-
Argile Textiles is evaluating a new product, a silk/wool blended fabric. Assume that you were recently hired as assistant to the director of capital budgeting, and you must evaluate the proposed...
-
Below is the article related to the funding and construction of the SD Padres' ballpark in downtown San Diego. The article below relates to the Padres' decision to incur substantial payoff...
-
A gate in an irrigation canal is constructed in the form of a trapezoid 3 ft wide at the bottom, 5 ft wide at the top, and 2 ft high. It is placed vertically in the canal, with the water extending to...
-
A particle executes simple harmonic motion with an amplitude of 3.00 cm. At what position does its speed equal half its maximum speed?
-
Bonsai Boards income statement data for the year ended December 31,2010, follow. Assume that the ending inventory was accidentally overstated by $3,300. How would the inventory error affect Bonsai...
-
A simple pendulum has a mass of 0.250 kg and a length of 1.00 m. It is displaced through an angle of 15.0 and then released. What are (a) the maximum speed, (b) The maximum angular acceleration, and...
-
How did you approach responding to Kyo's and Mike's commentsduring the team meeting?Explain
-
As part of an estate plan for Marsha, would you recommend a will, a will with a testamentary trust, or a revocable living trust? Why. Are the children old enough to voice their preference for a...
-
The Arcadia Company has 100,000 shares of cumulative, six percent, $100 par value preferred stock outstanding. Last year the company failed to pay its regular dividend, but the board of directors...
-
1. A vat of 12.0 kg of molten copper at its boiling point of 1083C is placed in a room with dimensions 3.00 m by 9.00 m by 3.00 m with an initial temperature of 20.0C. A) If air has a specific heat...
-
A particle with a positive charge of 29.9 x 10 -6 C is traveling at a constant rate of 82,656 m/s. It enters a uniform magnetic field of 3.6 T that is directed at an angle of 24 degrees with respect...
-
A piston-cylinder assembly contains air, initially at 3.1 bar, 144 K, and a volume of 3.8 m. The air undergoes a process to a state where the pressure is 0.8 bar, during which the pressure-volume...
-
An airplane in a holding pattern flies at constant altitude along a circular path of radius 3.70 km. If the airplane rounds half the circle in 170 s, determine the following. (a)Determine the...
-
A product dealer has collected the sales data for the past 10 years, shown in the following table. Year 1 23456roag 7 8 9 10 Product Sales (Units) 15 28 36 17 25 9 13 22 18 26 (a) Compute the...
-
Identify and describe one personal SMART goal intended to improve your ability to Manage and Engage Collaboration. Include an introduction describing why you have selected this goal. Identify and...
-
Sportique Boutique reported the following financial data for 2012 and 2011. Instructions(a) Calculate the current ratio for Sportique Boutique for 2012 and 2011.(b) Suppose that at the end of 2012,...
-
What is meant by the term cost structure?
-
Okanagan College has provided the following data to be used in its service department cost allocations: Required Using the direct method, allocate the costs of the service departments to the two...
-
Cumberland County Senior Services is a non-profit organization devoted to providing essential services to seniors who live in their own homes within the Cumberland County area. Three services are...
-
What controls are important in determining and recording manufacturing costs?
-
Indicate several ratios and their formulas that may be used in applying analytical procedures to inventory balances.
-
a. What documents and other information are used by the auditor in performing an inventory pricing test? b. How are confirmations used in the audit of inventory balances?
Study smarter with the SolutionInn App