Question
In: Economics
A computerized machining center has been proposed for a tool-manufacturing company. The new system costs $250,000...
A computerized machining center has been proposed for a tool-manufacturing company. The new system costs $250,000 and the company expects to borrow $100,000 at interest rate of 10% and paying for the remaining from its own funds. The loan of $100,000 is to be repaid in equal annual installments at 10% interest rate over eight years. Once the new system is installed, it will generate annual revenues of $125,000 and will require $23,500 in annual labor, $8,500 in annual material expenses, $2500 annual maintenance and another $9,000 in annual overhead (power and utility) expenses. The depreciation is based on straight line depreciation for 8 years. The company expects to phase out the facility at the end of 8 years, at which time it will be sold for $75,000. If the company’s MARR is 15% find the following: (1) The year-by-year after-tax net cash flow for the project at a 32% marginal tax rate; (2) The after-tax Net Present worth (NPW) of the project and (3) The internal rate of return
Solutions
Expert Solution
The detailed cashflow is in the table below. NPV, IRR have also been calculated. Explanation follows.
| Year | Self funds | Borrowed | EMI | Revenue | Labor | Material Expenses | Maintenance | Overhead | Depreciation | Salvage | Net Cashflow | After tax cashflow |
| 0 | -150000 | -100000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | -250000 | -250000 |
| 1 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 2 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 3 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 4 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 5 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 6 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 7 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 8 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 75000 | 115881 | 78799.08 |
| NPV | -108585 | |||||||||||
| IRR | 1.77% |
The yearly installment of the borrowed 100000 will be 18744. That will be a negative cashflow each year. Only revenue will be positive rest all are costs, which are shown as negative. Net cashflow is the revenue left after removing all costs each year. After tax cashflow is .68*net cashflow, as there is 32% tax on net cashflow.
NPV is calculated by the formula =NPV(cashflow)+initial
investment.
IRR has been calculated by the formula =IRR(cashflows).
Rahul Sunny answered 1 week agoRelated Solutions
XYZ company is considering a new machine that costs $250,000 and would reduce pre-tax manufacturing costs...
XYZ company is considering a new machine that costs $250,000 and
would reduce pre-tax manufacturing costs by $90,000 annually. XYZ
would use the 3-year MACRS method to depreciate the machine, and
management thinks the machine would have a value of $23,000 at the
end of its 5-year operating life. The applicable depreciation rates
are 33%, 45%, 15%, and 7%. The net operating Working capital would
increase by $25,000 initially, but it would be recovered at the end
of the project's...
XYZ company is considering a new machine that costs $250,000 and would reduce pre-tax manufacturing costs...
XYZ company is considering a new machine that costs $250,000 and
would reduce pre-tax manufacturing costs by $90,000 annually. XYZ
would use the 3-year MACRS method to depreciate the machine, and
management thinks the machine would have a value of $23,000 at the
end of its 5-year operating life. The applicable depreciation rates
are 33%, 45%, 15%, and 7%. The net operating Working capital would
increase by $25,000 initially, but it would be recovered at the end
of the project's...
A new asset has been proposed to your company: Year Investment O & M Costs Salvage...
A new asset has been proposed to your company:
Year
Investment
O & M Costs
Salvage Value
0
$14,000
1
$3,400
$8,000
2
$4,600
$6,000
3
$5,800
$4,000
4
$7,200
$2,000
5
$8,300
0
How long should the asset be kept? Use a MARR of 12%.
Holmes Manufacturing is considering a new machine that costs $250,000 and would reduce pre-tax manufacturing costs...
Holmes Manufacturing is considering a new machine that costs
$250,000 and would reduce
pre-tax manufacturing costs by $90,000 annually. Holmes would use
the 3-year MACRS
method to depreciate the machine, and management thinks the machine
would have a value
of $25,000 at the end of its 5-year operating life. The applicable
depreciation rates are 33%,
45%, 15%, and 7%. Net operating working capital would increase by
$25,000 initially, but
it would be recovered at the end of the project's 5-year...
A new design for the braking system on a certain type of car has been proposed....
A new design for the braking system on a certain type of car has
been proposed. For the current system, the true average braking
distance at 40 mph under specified conditions is known to be 120
ft. It is proposed that the new design be implemented only if
sample data strongly indicates a reduction in true average braking
distance for the new design.
(a) Define the parameter of interest.
μ = true average braking distance for the new design
μ...
A new design for the braking system on a certain type of car has been proposed....
A new design for the braking system on a certain type of car has
been proposed. For the current system, the true average braking
distance at 40 mph under specified conditions is known to be 120
ft. It is proposed that the new design be implemented only if
sample data strongly indicates a reduction in true average braking
distance for the new design.
a. Define the parameter of interest.
b. State the relevant hypotheses.
c. Suppose braking distance for the...
Two proposals for manufacturing a new product have been proposed to the board of directors of...
Two proposals for manufacturing a new product have been proposed
to the board of directors of ‘Salamis’ Ltd. Market research
indicates that there is strong demand for the product.
Proposal 1: The company will acquire plant costing £900,000.
Fixed expenses (other than depreciation) would amount to £570,000
per annum and variable expenses per unit would be £350.
Proposal 2: The company will acquire plant costing £800,000.
Fixed expenses (other than depreciation) would amount to £240,000
per annum and variable expenses...
A popular equipment company wants to provide a new computerized sound system in order to play...
A popular equipment company wants to provide a new computerized
sound system in order to play at bigger convert that will generate
$ 11 million dollar in new income. The system costs $4 million
dolars has a life of 10 years and annual maintainace cost that is
5% of the initial cost at year 5 the system will require $50
thousands rebuild and upgrade cost the company IRR is 6 % and MARR
=20% determine the RoR for the investment
Tundra Tots is evaluating the proposed acquisition of new equipment at a cost of $250,000. In...
Tundra Tots is evaluating the proposed acquisition of new
equipment at a cost of $250,000. In addition the equipment would
require modifications at a cost of $20,000 plus shipping costs of
$3,000. The equipment falls into the MACRS 3-year class, and will
be sold after 3 years for $25,000. The equipment would require
increased inventory of $4,000. The equipment is expected to save
the company $25,000 per year in before-tax operating costs. The
company's marginal tax rate is 30 percent...
Mason Company has two manufacturing departments—Machining and Assembly. The company considers all of its manufacturing overhead...
Mason Company has two manufacturing departments—Machining and
Assembly. The company considers all of its manufacturing overhead
costs to be fixed costs. It provided the following estimates at the
beginning of the year as well as the following information with
respect to Jobs A and B:
Estimated DataMachiningAssemblyTotalManufacturing
overhead$12,500,000 $625,000 $13,125,000 Direct labor hours
25,000 500,000 525,000 Machine hours
500,000 20,000 520,000
Job AMachiningAssemblyTotalDirect labor
hours51015Machine hours11213
Job BMachiningAssemblyTotalDirect labor hours459Machine
hours12315
Required:
1. If Mason Company uses a plantwide predetermined overhead rate
with direct...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Provide two text boxes for the user to enter in 2 values. Once the user clicks...
- The partially completed inventory record for the driveshaft subassembly in the table below shows gross? requirements,...
- A 2.50-kg grinding wheel is in the form of a solid cylinder of radius 0.100 m....
- How do you think companies decide which type of private debt they will use? Do they...
- In Economics we differentiate between peoples’ “wants and needs” and their “resources”. Explain what these terms...
- (a) If your utility is represented by u(x,y) = min(x+2y,2x+y);what do you indifference curves look like?...
- there are many ways in which we can manage our evironmental impacts. choose two iniyiatives that...
ADVERTISEMENT