Clover Company plans to invest $7.85 million in a new piece of equipment that will be...

Clover Company plans to invest $7.85 million in a new piece of equipment that will be used on a major product line. The equipment is expected to last 10 years with a salvage value of zero.

The company anticipates the new equipment will be able to produce 200,000 additional units to meet the increasing demand for the product.

The product sells for $18 per unit, variable costs are $7.20 per unit and annual fixed operating costs (excluding depreciation) will be $770,000 (these amounts are all cash basis).

The company uses straight line depreciation.

The required rate of return is 12%.

If NPV is used to evaluate the project, should it be considered?
Should we expect the IRR for the project to be higher, lower or the same as the required rate of return? Prove your answer by calculating the IRR for the project

Solutions

Expert Solution

Hope it helps.. In case of any doubts or issues, please do comment below

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

LifeCycle Biotech Company plans to invest $100 million into a new facility. It plans to use...

LifeCycle Biotech Company plans to invest $100 million into a new facility. It plans to use $20 million from its reserves and sell bonds at an interest rate of 4 percent to the public to raise the remaining $80 million. At the same time the U.S. has a budget deficit and decides to sell U.S. bonds to the public for 5 percent. a) Will LifeCycle Biotech Company make the investment? No Yes b) The government is now in competition with...

A construction company plans to invest in new equipment to improve their productivity. The planned investment...

A construction company plans to invest in new equipment to improve their productivity. The planned investment is $500,000 now and $100,000 in year 1. The gross income for year 1 is $175,000, year 2 is $300,000, and year 3 is $600,000. Taxes related to the investment are $50,000 in year 1, $75,000 in year 2 and $100,000 in year 3. Determine: The before tax rate of return for the investment The after-tax rate of return for the investment How does...

A construction company plans to invest in new equipment to improve their productivity. The planned investment...

A construction company plans to invest in new equipment to improve their productivity. The planned investment is $500,000 now and $100,000 in year 1. The gross income for year 1 is $175,000, year 2 is $300,000, and year 3 is $600,000. Taxes related to the investment are $50,000 in year 1, $75,000 in year 2 and $100,000 in year 3. Determine: a) The before tax rate of return for the investment b) The after-tax rate of return for the investment...

company plans to invest in new equipment to improve productivity. The planned investment is $500,000 now...

company plans to invest in new equipment to improve productivity. The planned investment is $500,000 now and $100,000 in year 1. The gross income for year 1 is $175,000, year 2 is $300,000, and year 3 is $600,000. Taxes related to the investment are $50,000 in year 1, $75,000 in year 2 and $100,000 in year 3. solve for: The before tax rate of return for the investment, The after-tax rate of return for the investment and How does the...

To open a new store, Jordan Tire Company plans to invest $392,000 in equipment expected to...

To open a new store, Jordan Tire Company plans to invest $392,000 in equipment expected to have a seven -year useful life and no salvage value. Jordan expects the new store to generate annual cash revenues of $316,000 and to incur annual cash operating expenses of $189,000. Jordan’s average income tax rate is 35 percent. The company uses straight-line depreciation. Required Determine the expected annual net cash flows from operations for each of the first four years after Jordan opens...

To open a new store, Linton Tire Company plans to invest $212,000 in equipment expected to...

To open a new store, Linton Tire Company plans to invest $212,000 in equipment expected to have a four -year useful life and no salvage value. Linton expects the new store to generate annual cash revenues of $316,000 and to incur annual cash operating expenses of $195,000. Linton’s average income tax rate is 35 percent. The company uses straight-line depreciation. Required Determine the expected annual net cash inflow / outflow from operations for each of the first four years after...

a) Boulder Milling is evaluating a proposal to invest in a new piece of equipment costing...

a) Boulder Milling is evaluating a proposal to invest in a new piece of equipment costing $160,000 (salvage value = $10,000) with the following annual cash flows over the equipment's 4-year useful life. There is an initial working capital payment of $50,000 required for this equipment. Cash revenues Cash expenses Depreciation expenses (straight-line) Income provided from equipment Cost of capital Note: Depreciation is a non-cash expense $120,000 (64,000) (20,000) $36,000 12 percent Periods Present value of $1 8% 10% 12%...

The Severn Company plans to raise a net amount of $270 million to finance new equipment...

The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2017. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 10% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows: The Severn Company: Balance Sheet as of December 31, 2016 (Millions of Dollars) Current assets $ 900.00 Notes payable $ 255.00 Net fixed...

The Severn Company plans to raise a net amount of $270 million to finance new equipment...

Your company plans to purchase some new equipment with anestimated cost of $2.00 million two...

Your company plans to purchase some new equipment with an estimated cost of $2.00 million two years from now. Your company earns 5.1% compounded monthly on its savings. How much does the company need to save at the end of each month if it wants to pay cash for this purchase?

Subjects