DeLuxe Furniture is thinking of buying a wood cutting machine for $150,000 that would save it...

DeLuxe Furniture is thinking of buying a wood cutting machine for $150,000 that would save it $40,000 per year in production costs. The savings would be constant over the project's 3-year life. The machine is to be linearly depreciated to zero and will have no resale value after 3 years.

The machine would require an additional $9,000 in net operating working capital. The appropriate cost of capital for this project is 14% and the company's tax rate is 35%.

	Year 0	Year 1	Year 2	Year 3
Cost savings	0	40,000	40,000	40,000
Depreciation	0	50,000	50,000	50,000
EBIT	0	-10,000	-10,000	-10,000
Taxes (35%)
Net income
Depreciation
NOPAT + DEP
CAPEX
ΔNOWC
FCF

Attempt 1/5 for 8 pts.

Part 1

What is the free cash flow in year 0? Choose the right sign.

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 2

What is the free cash flow in year 1?

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 3

What is the free cash flow in year 2?

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 4

What is the free cash flow in year 3?

Hint: add the recovery of net operating working capital.

Try againSee solution (-2 pts.)Move on

Attempt 1/5 for 8 pts.

Part 5

What is the NPV of this project?

Solutions

Expert Solution

jeff jeffy answered 4 months ago

Next > < Previous

Related Solutions

1. The new wood cutting machine will cost $420,000 and its depreciation is over 10 years...

1. The new wood cutting machine will cost $420,000 and its depreciation is over 10 years to zero using the straight-line method. At the end of 5 years, the estimated value of the wood cutting machine is $50,000. How mush is the first year to fifth year depreciation? 2. The total cost of the required 3D printers is $750,000 and its depreciation is over 15 years to zero using the straight-line method. At the end of 5 years, the estimated...

QUESTION #5: X Company is considering buying a new machine that will cost $150,000 and that...

QUESTION #5: X Company is considering buying a new machine that will cost $150,000 and that will generate annual cash inflows of $31,470 for 6 years. What is the approximate internal rate of return?

Wood Products Company would like to purchase a computerized wood lathe for $100,000. The machine is...

Wood Products Company would like to purchase a computerized wood lathe for $100,000. The machine is expected to have a life of 5 years, and a salvage value of $5,000. Annual maintenance costs will total $20,000. Annual cash receipts resulting from this machine are predicted to be $45,000. The company’s required rate of return is 15 percent. Use Excel to calculate the net present value. (7.2) Use Excel to calculate the internal rate of return. (7.3) Based on your answer...

A furniture factory has 2230 machine hours available each week in the cutting department, 1470 hours...

A furniture factory has 2230 machine hours available each week in the cutting department, 1470 hours in the assembly department, and 2960 in the finishing department. Manufacturing a chair requires 0.3 hours of cutting, 0.5 hours of assembly, and 0.6 hours of finishing. A cabinet requires 0.8 hours of cutting, 0.3 hours of assembly, and 0.1 hours of finishing. A buffet requires 0.2 hours of cutting, 0.1 hours of assembly, and 0.9 hours of finishing. How many chairs, cabinets, and...

Cost-Cutting ProposalsStarset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a...

Cost-Cutting ProposalsStarset Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $670,000 is estimated to result in $245,000 in annual pretax cost savings. The press falls in the 5-year MACRS class, and it will have a salvage value at the end of the project of $55,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional $2,500 in inventory for each succeeding year of...

In order to buy an automated packing machine for your factory, the cost would be $150,000....

In order to buy an automated packing machine for your factory, the cost would be $150,000. You have inquired at the bank about borrowing that amount and the bank would charge you a rate of 9.5 percent on the loan. The packing machine would be used for 10 years, at the end of which it would have no salvage value. It falls in an asset class with an allowable CCA rate of 10 percent per year. The use of the...

Elliot is thinking about buying a mixer for $12,000. It would have a 5 year life...

Elliot is thinking about buying a mixer for $12,000. It would have a 5 year life with a salvage value of $2,000. It would decrease operating costs by $1,000 each year of its economic life. The straight-line depreciation method would be used for it with the cost of capital being 6%. 1. What is the payback period? (use 2 decimal places) 2. What is the annual rate of return? (use 2 decimal places) 3. What is the internal rate of...

Rex Berhad is considering buying a new production machine. The proposed machine would cost the company...

Rex Berhad is considering buying a new production machine. The proposed machine would cost the company RM85,000 and require an installation and modification cost of RM1,500 to be installed properly. In addition, the new machine would require an increase of inventory and account payable of RM 3 000 and RM1 700 respectively. The new machine will be depreciated over its five year life using the simplified straight line method. By using the new machine, sales is expected to increase by...

A company is considering buying a machine that would give a net cost savings of $70,000...

A company is considering buying a machine that would give a net cost savings of $70,000 per year for 10 years. The cost of the machine is $325,000. The company’s weighted average cost of capital is 12%. What is the difference between the IRR and the ARR?

Davis Inc. is considering buying a new machine for $5 million. This would replace an old...

Davis Inc. is considering buying a new machine for $5 million. This would replace an old machine that they had bought five years ago for $4 million. The old machine was being depreciated using the straight line method and had a 10 year useful life when it was first purchased. They could not sell it at this point since the old machine technology is obsolete. If Davis decides to buy the new machine and replace the old one, what is...

Subjects