Question

In: Finance

A firm is considering an investment of $480,000 in new equipment to replace old equipment with...

A firm is considering an investment of $480,000 in new equipment to replace old equipment with a book value of $95,000 and a market value of $63,000. If the firm replaces the old equipment with new equipment, it expects to save $120,000 in operating costs the first year. The amount of savings will grow at a rate of 8 percent per year for each of the following five years. Both pieces of equipment belong to asset class 8, which has a CCA rate of 20 percent. The salvage values of both the old equipment and the new equipment at the end of six years are $11,000 and $78,000, respectively. There are other assets in the asset class when the project terminates. In addition, replacement of the old equipment with the new equipment requires an immediate increase in net working capital of $50,000. The firm’s marginal tax rate is 35 percent and cost of capital is 11 percent.

a) What is the initial after-tax cash flow?

b) What is the present value of the incremental CCA tax savings?

c) What is the present value of the incremental after-tax operating cash flows?

d) What is the present value of the incremental ending after-tax cash flow?

e) What is the NPV of the replacement project?

Solutions

Expert Solution

Please refer to the following screenshots showing the calculations :

Formulas used (formula view):

(*Please rate thumbs up)

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A firm is considering an investment of $480,000 in new equipment to replace old equipment with...
A firm is considering an investment of $480,000 in new equipment to replace old equipment with a book value of $95,000 and a market value of $63,000. If the firm replaces the old equipment with new equipment, it expects to save $120,000 in operating costs the first year. The amount of savings will grow at a rate of 8 percent per year for each of the following five years. Both pieces of equipment belong to asset class 8, which has...
A firm is considering an investment of $480,000 in new equipment to replace old equipment with...
A firm is considering an investment of $480,000 in new equipment to replace old equipment with a book value of $95,000 and a market value of $63,000. If the firm replaces the old equipment with new equipment, it expects to save $120,000 in operating costs the first year. The amount of savings will grow at a rate of 8 percent per year for each of the following five years. Both pieces of equipment belong to asset class 8, which has...
ABC Company is considering the acquisition of a new piece of equipment to replace an old,...
ABC Company is considering the acquisition of a new piece of equipment to replace an old, outdated machine currently used in its business operations. The new equipment would cost $135,000 and is expected to last 9 years. The new equipment would require a repair of $25,000 in year four and another repair costing $80,000 in year eight. Purchasing this new equipment would require an immediate investment of $30,000 in working capital which would be released for investment elsewhere at the...
A firm is considering a project that requires an initial investment of $300,000 in new equipment,...
A firm is considering a project that requires an initial investment of $300,000 in new equipment, which has a five-year life and a CCA rate of 30 percent. An initial investment in raw materials inventory of $50,000 is also required to support the project, which will rise to 15 percent of sales. The project will generate sales revenue of $400,000 in the first year, which will grow at 4 percent per year. Variable costs will be $220,000 for the first...
Monty Industries is considering the purchase of new equipment costing $1,300,000 to replace existing equipment that...
Monty Industries is considering the purchase of new equipment costing $1,300,000 to replace existing equipment that will be sold for $194,000. The new equipment is expected to have a $223,000 salvage value at the end of its 4-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 32,600 units annually at a sales price of $27 per unit. Those units will have a variable cost of $15 per unit. The...
Bene Company is considering selling a piece of factory equipment and buying new equipment to replace...
Bene Company is considering selling a piece of factory equipment and buying new equipment to replace it. Identify two cash flows that must be considered and how they would be determined.
Tall Oaks Corp. is considering a new machine that requires an initial investment of $480,000 installed,...
Tall Oaks Corp. is considering a new machine that requires an initial investment of $480,000 installed, and has a useful life of 8 years. The expected annual after-tax cash flows for the machine are $89,000 for each of the 8 years and nothing thereafter. a. Calculate the net present value of the machine if the required rate of return is 11 percent. b. Calculate the IRR of this project. c. Should Tall Oaks accept the project (assume that it is...
1. A firm is considering a new investment whose data are shown below. The equipment would...
1. A firm is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require additional net operating working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV ( no decimal places)  (Hint: Cash flows from operations are...
Blue Spruce Industries is considering the purchase of new equipment costing $1,207,000 to replace existing equipment...
Blue Spruce Industries is considering the purchase of new equipment costing $1,207,000 to replace existing equipment that will be sold for $188,800. The new equipment is expected to have a $203,000 salvage value at the end of its 5-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 38,800 units annually at a sales price of $21 per unit. Those units will have a variable cost of $14 per unit....
Blue Spruce Industries is considering the purchase of new equipment costing $1,248,000 to replace existing equipment...
Blue Spruce Industries is considering the purchase of new equipment costing $1,248,000 to replace existing equipment that will be sold for $181,600. The new equipment is expected to have a $210,000 salvage value at the end of its 5-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 38,400 units annually at a sales price of $29 per unit. Those units will have a variable cost of $14 per unit....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT