Suppose that Mitsubishi Chemical Corporation is planning to buy new equipment to expand its production of a

Question:

Suppose that Mitsubishi Chemical Corporation is planning to buy new equipment to expand its production of a popular solvent. Estimated data are as follows (monetary amounts are in thousands of Japanese yen):

Cash cost of new equipment now ……………………… ¥400,000

Estimated life in years …………………………………………. 10

Terminal salvage value ………………………………….. ¥ 50,000

Incremental revenues per year …………………………… ¥330,000

Incremental expenses per year other than depreciation … ¥165,000

Assume a 60% flat rate for income taxes. The company receives all revenues and pays all expenses other than depreciation in cash. Use a 14% discount rate. Assume that the company uses ordinary straight-line depreciation based on a 10-year recovery period for tax purposes. Also assume that the company depreciates the original cost less the terminal salvage value.

Compute the following:

1. Depreciation expense per year

2. Anticipated net income per year

3. Annual net cash flow

4. Payback period

5. ARR on initial investment

6. NPV

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...