Question

In: Finance

You consider a new piece of equipment that will cost $400,000, and will require $20,000 for...

You consider a new piece of equipment that will cost $400,000, and will require $20,000 for shipping and installation. NWC will increase immediately by $25,000. The project will last 3 years and the equipment has a 5 year class life. Revenues will increase by $220,000/year, and defect costs will decrease by $220,000/year. Operating costs will increase by $30,000/year. The market value of the equipment after year 3 is $200,000. The cost of capital is 12%; marginal tax rate is 30%. What is the NPV?

Solutions

Expert Solution

Operating cashflows
Year1 YEar2 YEar3
Revenue generated 220000 220000 220000
savings in defects cpst 220000 220000 220000
Operating cost -30000 -30000 -30000
Depreciation -84000 -134400 -80640
(420000*20%) (420000*32%) (420000*19.20%)
Net Income before tax 326000 275600 329360
Less: tax @ 30% 97800 82680 98808
After tax Income 228200 192920 230552
Add: Dep 84000 134400 80640
Annual Operating cashflows 312200 327320 311192
After tax salvage:
Market value of FA 200000
Less: Book value of assets (420000*28.80%) 120960
Gain on sales 79040
tax on gain 23712
Net cash flows from Sales 55328
NPV:
Year0 Year1 Year2 Year3
Annual operating cashflows 0 312200 327320 311192
After tax salvage 55328
Release in NWC 25000
Investment in FA -420000
Investment in WC -25000
Netcashflows -445000 312200 327320 391520
PVF at 12% 1 0.892857 0.797194 0.71178
Present value of cashflows -445000 278750 260937.5 278676.2
NPV 373364

jeff jeffy answered 3 months ago
Next > < Previous

Related Solutions

[11] A piece of equipment was acquired for a cost of $400,000. It had an estimated...
[11] A piece of equipment was acquired for a cost of $400,000. It had an estimated useful life of 5 years. The estimated salvage value is $40,000. The company controller uses a double declining balance method of accelerated depreciation. The piece of equipment was purchased on Oct. 1, 2014.   The company is generating projections for the next few years and has asked you to show him what depreciation expense, accumulated depreciation, and book value of this piece of equipment will...
Additional information Important Note: The sale of equipment (piece A) had a historical cost of $20,000...
Additional information Important Note: The sale of equipment (piece A) had a historical cost of $20,000 and accumulated depreciation of $10,000. It was sold for cash of $10,000. GST is not included so ignore the GST component of transactions. Prepare a Statement of Cash Flows for the year ended 30 June 2016 in accordance with accounting standards. Prepare a statement reconciling cash flows from operating activities with profit. The following are the financial statements of North Point Enterprises for the...
ben is considering the purchase of new piece of equipment. the cost savings from the equipment...
ben is considering the purchase of new piece of equipment. the cost savings from the equipment would result in an annual increase in net income of $200000. the equipment will have an initial cost of $1200000 and have an 8 year life. the salvage value of the equipment is estimated to be $200000. the hurdle rate is 10%. what is accounting rate of return? b) what is the payback period? c) what is the net present value? d) what would...
A new piece of equipment costs $25,000. The annual cost of using the equipment is projected...
A new piece of equipment costs $25,000. The annual cost of using the equipment is projected to be $1000. Annual maintenance costs are expected to be $400 the first year, increasing by $75/yr each year after that. The effective annual interest rate is 5%. Using correct equivalence notation, write out (but do not solve) the equation that would be used to find the equivalent annual cost of purchasing the equipment for its 20-year lifespan.
The ABC Company is looking at a new piece of equipment with an installed cost of...
The ABC Company is looking at a new piece of equipment with an installed cost of $187,400. This cost will be depreciated straight-line to zero over the four-year life. At the end of the four years the book value will be zero however it can be scrapped for $25,000. The equipment will save the firm $99,000 per year in pre-tax operating costs and the equipment requires an initial investment in net working capital of $9,000 and will be recovered at...
A new piece of equipment will have a fixed cost of $250,000 and the product it...
A new piece of equipment will have a fixed cost of $250,000 and the product it would produce has a variable cost of $22.50, and a selling price of $35. A. What is the break-even point? B. How many units must be sold to make a profit of $750,000? C. How many units must be sold to average $0.50 profit per unit? $0.75 profit per unit? And $2.50 per unit? D. If investors expect a 15% Return on Investment (ROI),...
You must evaluate the purchase of a proposed piece of equipment. The cost of the equipment...
You must evaluate the purchase of a proposed piece of equipment. The cost of the equipment is $50,000. The installation and transportation cost of bringing the equipment to its location is $6,000. The equipment falls into the MACRS 3-year class. The project is expected to increase revenues by $80,000 each year and increase operating costs (excluding depreciation) by $30,000 each year. This project leads to an increase in net operating working capital by $10,000. You can salvage the equipment for...
You must evaluate the purchase of a proposed piece of equipment. The cost of the equipment...
You must evaluate the purchase of a proposed piece of equipment. The cost of the equipment is $50,000. The installation and transportation cost of bringing the equipment to its location is $6,000. The equipment falls into the MACRS 3-year class. The project is expected to increase revenues by $80,000 each year and increase operating costs (excluding depreciation) by $30,000 each year. This project leads to an increase in net operating working capital by $10,000. You can salvage the equipment for...
You must evaluate the purchase of a proposed piece of equipment. The cost of the equipment...
You must evaluate the purchase of a proposed piece of equipment. The cost of the equipment is $50,000. The installation and transportation cost of bringing the equipment to its location is $6,000. The equipment falls into the MACRS 3-year class. The project is expected to increase revenues by $80,000 each year and increase operating costs (excluding depreciation) by $30,000 each year. This project leads to an increase in net operating working capital by $10,000. You can salvage the equipment for...
a piece of construction equipment will cost $71,000 new and willhave an expected life of...
a piece of construction equipment will cost $71,000 new and will have an expected life of 6 years, with no remaining value at the end of its life. what is the equivalent uniform annual cost of this piece of equipment if the interest rate is 10%?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT