Question

In: Accounting

Acme Storage is evaluating an investment to produce a new product with an extended marketable life...

Acme Storage is evaluating an investment to produce a new product with an extended marketable life of 4 years. In order to produce this product, the company will have to acquire a piece of new equipment worth $400,000. The opportunity cost of borrowing for an asset which has a purchase price of $400,000 is 15%. Other details of each alternative are provided as follows:

Purchase:

This equipment can be depreciated at 30% reducing balance if owned, and has an expected salvage value of $100,000 after 4 years.

Lease:

If the lease is in advance, there will be four payments of $145,000 made at the beginning of each year and a residual payment of $40,000 made at the end of the term, i.e., at the end of year 4.

The company tax rate is 25%. Calculate the NPV of leasing and advise the company as to whether it should purchase or lease the equipment with payments made in advance?

Solutions

Expert Solution


Related Solutions

CSC is evaluating a new project to produce encapsulators. The initial investment in plant and equipment...
CSC is evaluating a new project to produce encapsulators. The initial investment in plant and equipment is $500,000. Sales of encapsulators in year 1 are forecasted at $200,000 and costs at $100,000. Both are expected to increase by 10% a year in line with inflation. Profits are taxed at 35%. Working capital in each year consists of inventories of raw materials and is forecasted at 20% of sales in the following year. The project will last five years and the...
A company is considering of a new product line that is believed to be marketable for...
A company is considering of a new product line that is believed to be marketable for the next 10 years. An initial investment of $215,000 will be required with an estimated salvage value of $40,000 at the end of 10 years. The annual receipts will start at $53,000, the first year and then increase by $2000 each year thereafter. Disbursements will start at $21,000 the first year and increase by $500 each year thereafter. What is the prospective rate of...
SC Co is evaluating the purchase of a new machine to produce product P, which has...
SC Co is evaluating the purchase of a new machine to produce product P, which has a short product life-cycle due to rapidly changing technology. The machine is expected to cost Rs.1 million. Production and sales of product P are forecast to be as follows: Year - Production and sales (units(year)                          1 - 90,000 2 - 53,000 3 - 75,000 4 - 36,000 The selling price of product P (in current price terms) will be Rs. 20 per unit, while...
Question one SC Co is evaluating the purchase of a new machine to produce product P...
Question one SC Co is evaluating the purchase of a new machine to produce product P , Which has a short product life-cycle due to rapidly changing technology .The machine is expected to cost $1 million . Production and sales of product P are forecast to be as follows : Year 1 2 3 4 Production and sales (units/year) 35000 53000 75000 36000 The selling price 0f product P (in current price terms )will be $20 per unit, while the...
A new extended-life light bulb has an average life of 750 hours, with a standard deviation...
A new extended-life light bulb has an average life of 750 hours, with a standard deviation of 50 hours. If the life of these light bulbs approximates a normal distribution, about what percent of the distribution will be between 650 hours and 850 hours?
Bill Smith, CFO of Acme Inc., is evaluating a new project that costs $125,000 and is...
Bill Smith, CFO of Acme Inc., is evaluating a new project that costs $125,000 and is expected to last 6 years. The required return on this project is 15%, compounded monthly. This project is expected to earn the same cash flow each month over the life of the project. In order to be indifferent between accepting and rejecting this project, the monthly cash flow must be: A) $2,004.34 B) $2,942.65 C) $2,752.47 D) $1,736.11 E) $2,643.13 need steps and explanation
Acme is considering a new project that requires an investment of $100 million in machinery. This...
Acme is considering a new project that requires an investment of $100 million in machinery. This is expected to produce earnings before interest and taxes of $16 million per year for 4 years. The machinery will be fully depreciated to a zero-book value over 4 years using straight-line depreciation. Working capital costs are negligible. The tax rate is 25%. The unlevered cost of capital is 13%. They have a target debt ratio (debt/value) for the firm of 45%. Joker plans...
Acme Corporation incurred $6,000 to produce the following products in a joint production process Product X...
Acme Corporation incurred $6,000 to produce the following products in a joint production process Product X Product Y Quantity produced and processed beyond split-off point 230 units 490 units Sales Value at split-off $75 $15.50 Separable Costs $1,000 $2,800 Selling price of a fully processed unit $80 $20 Compute the amount of joint costs using: 1. physical measures method 2. sales value at split-off method 3. NRV method 4. constant gross margin method
You are evaluating a project (initial investment is $41,000) that is expected to produce cash flows...
You are evaluating a project (initial investment is $41,000) that is expected to produce cash flows of $5,000 each year for the next ten years and $7,000 each year for the following ten years. The IRR of this project is 12%. The firm’s WACC is 8%. What is the project’s NPV?
The Product Life Cycle Part & The New Product Process Assess the value of the product...
The Product Life Cycle Part & The New Product Process Assess the value of the product life cycle as a tool for product succession planning and related product management activities. Give your opinion on whether or not the Product Life Cycle can help health care managers in promoting portfolio planning, strategy formulation, and forecasting. Provide one (1) example to support your rationale. Select two (2) stages of the Product Life Cycle. Describe the methods for strategically and tactically managing products...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT