Question

In: Finance

WWT is considering replacing a $5 million piece of equipment. The project will generate pretax savings...

WWT is considering replacing a $5 million piece of equipment. The project will generate pretax savings of $1,500,000 per year, and not change the risk level of the firm. The initial expense will be depreciated straight-line to zero salvage value over 5 years; the pretax salvage value in year 5 will be $500,000. The firm can obtain a 5-year $3,000,000 loan at 12.5% to partially finance the project. If the project were financed with all equity, the cost of capital would be 18%. The corporate tax rate is 34%, and the risk-free rate is 4%. The project will require a $100,000 investment in net working capital. Calculate the APV.

Solutions

Expert Solution

jeff jeffy answered 2 months ago
Next > < Previous

Related Solutions

TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment....
TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment. Details for both are given below: Old Equipment New Equipment Current book value $1,500,000 Current market value $2,500,000 Acquisition cost $6,200,000 Remaining life 10 years Life 10 years Annual sales $350,000 Annual sales $850,000 Cash operating expenses $140,000 Cash operating expenses $500,000 Annual depreciation $150,000 Annual depreciation $620,000 Accounting salvage value $0 Accounting salvage value $0 Expected salvage value after 10 years $240,000 Expected...
TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment....
TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment. Details for both are given below: Old Equipment New Equipment Current book value $1,800,000 Current market value $2,500,000 Acquisition cost $6,200,000 Remaining life 10 years Life 10 years Annual sales $350,000 Annual sales $850,000 Cash operating expenses $140,000 Cash operating expenses $500,000 Annual depreciation $180,000 Annual depreciation $620,000 Accounting salvage value $0 Accounting salvage value $0 Expected salvage value $240,000 Expected salvage value $750,000...
4. Johnson Co. is considering replacing an existing piece of equipment. The project involves the following:...
4. Johnson Co. is considering replacing an existing piece of equipment. The project involves the following: - The new equipment will have a cost of $1,200,000, and it will be depreciated on a straight line basis over a period of six years (years 1-6) - The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left. ($50,000 per year) - The new equipment...
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...
Burton, a manufacturer of snowboards, is considering replacing an existing piece of equipment with a more...
Burton, a manufacturer of snowboards, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given. · The proposed machine will cost $120,000 and have installation costs of $20,000. It will be depreciated using a 3 year MACRS recovery schedule. It can be sold for $60,000 after three years of use (before tax; at the end of year 3). The existing machine was purchased two years ago for $95,000 (including installation). It is...
1. Burton, a manufacturer of snowboards, is considering replacing an existing piece of equipment with a...
1. Burton, a manufacturer of snowboards, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given. The proposed machine will cost $120,000 and have installation costs of $20,000. It will be depreciated using a 3 year MACRS recovery schedule. It can be sold for $60,000 after three years of use (before tax; at the end of year 3). The existing machine was purchased two years ago for $95,000 (including installation). It is...
considering investing in a new piece of equipment that is expected to generate $30,000 of revenue...
considering investing in a new piece of equipment that is expected to generate $30,000 of revenue the first year, increasing 15% per year for the 9 year useful life. The salvage value is expected to be 20% of the initial investment. Using a MARR of 10% and an equivalent worth method, determine the maximum your company should pay for the equipment in order for this to be a satisfactory investment.
PADICO is considering an investment project. The project requires an initial $5 million outlay for equipment...
PADICO is considering an investment project. The project requires an initial $5 million outlay for equipment and machinery. Sales are projected to be $2.5 million per year for the next four years. The equipment will be fully depreciated straight-line by the end of year 4. The cost of goods sold and operating expenses (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for $500,000 at the end of year 4.Padico also needs to add...
PADICO is considering an investment project. The project requires an initial $5 million outlay for equipment...
PADICO is considering an investment project. The project requires an initial $5 million outlay for equipment and machinery. Sales are projected to be $2.5 million per year for the next four years. The equipment will be fully depreciated straight-line by the end of year 4. The cost of goods sold and operating expenses (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for $500,000 at the end of year 4.Padico also needs to add...
PADICO is considering an investment project. The project requires an initial $5 million outlay for equipment...
PADICO is considering an investment project. The project requires an initial $5 million outlay for equipment and machinery. Sales are projected to be $2.5 million per year for the next four years. The equipment will be fully depreciated straight-line by the end of year 4. The cost of goods sold and operating expenses (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for $500,000 at the end of year 4.Padico also needs to add...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT