Use the computerized model in File C13 to work this problem. Golden State Bakers, Inc. (GSB) has an opportunity to invest in a new dough machine. GSB needs more productive capacity, so the new machine will not replace an existing
Use the computerized model in File C13 to work this problem. Golden State Bakers, Inc. (GSB) has an opportunity to invest in a new dough machine. GSB needs more productive capacity, so the new machine will not replace an existing machine. The new machine is priced at $260,000 and will require modifications costing $15,000. It has an expected useful life of 10 years, will be depreciated using the MACRS method over its 5-year class life, and has an expected salvage value of $12,500 at the end of Year 10. The machine will require a $22,500 investment in net working capital. It is expected to generate additional sales revenues of $125,000 per year, but its use also will increase annual cash operating expenses by $55,000. GSB’s required rate of return is 10 percent, and its marginal tax rate is 40 percent. The machine’s book value at the end of Year 10 will be $0, so GSB will have to pay taxes on the $12,500 salvage value.
a. What is the NPV of this expansion project? Should GSB purchase the new machine?
b. Should GSB purchase the new machine if it is expected to be used for only five years and then sold for $31,250?
c. Would the machine be profitable if revenues increased by only $105,000 per year? Assume a 10-year project life and a salvage value of $12,500.
d. Suppose that revenues rose by $125,000 but expenses rose by $65,000. Would the machine be acceptable under these conditions? Assume a 10-year project life and a salvage value of $12,500.
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...
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a The NPV of the project is positive NPV 57 186 so Golden State should purchase the machine and expand its operations INPUT DATA KEY OUTPUT Base price …View the full answer
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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