Question

In: Accounting

Exercise HW •A company is trying to purchase a certain equipment for $100,000 that will have...

Exercise HW

•A company is trying to purchase a certain equipment for $100,000 that will have a market value of $12,000 on disposal at year 5. This equipment will have an output of 10,000 units annually and each unit will be sold for $5, total expenses will be $2.8 per unit.

Before tax MARR is 20%, effective income tax is 30%

Use MACRS-GDS half year convention (equipment is in the 5 years property).

Calculate the present worth of the ATCF. Is this still a good investment after tax?

Solutions

Expert Solution

Computation of Cash Inflows per annum:

Net operating income per annum (2.2x10000)                 22000

Less Tax @ 30%                                                             6600

                                                                                 -------------------

Profit after tax                                                                   15400

Add Depreciation (100000-12000/5)                                17600

                                                                                       -----------------

Cash Infow                                                                       33000

                                                                                      ==========

Computation of Net Present Value:

Present value of cash inflows (33000 x cumulative discounting factor 2.984)                     98472

Less Initial cash outlay (10000 less salvage value 12000xdiscounting factor 0.402)          95176

(100000-4824)

                                                                                                                             ------------------------------

Net Present Value                                                                                                       $ 3296

                                                                                                                             ============

Since the Net present value is positive, the company should proceed with the investmenet.                                                                                                  

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

On April 1, 2011, Company A purchased equipment for $100,000. On the purchase, a sales tax...
On April 1, 2011, Company A purchased equipment for $100,000. On the purchase, a sales tax of 15% is being paid. The equipment has defected, so a maintenance cost of $2000 is incurred for repairs. After the equipment arrives, the company must pay the transportation cost of $5000. The company also paid installation and testing costs of $20000. This equipment is estimated to have 5-year useful life. At the end of the 5th year, the salvage value (residual value) will...
On April 1, 2011, Company A purchased equipment for $100,000. On the purchase, a sales tax...
On April 1, 2011, Company A purchased equipment for $100,000. On the purchase, a sales tax of 15% is being paid. The equipment has defected, so a maintenance cost of $2000 is incurred for repairs. After the equipment arrives, the company must pay the transportation cost of $5000. The company also paid installation and testing costs of $20000. This equipment is estimated to have 5-year useful life. At the end of the 5th year, the salvage value (residual value) will...
The Hyatt Company is trying to decide whether it should purchase new equipment and continue to...
The Hyatt Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier. Either way production cannot continue using the current equipment.                         New equipment for producing the subassemblies can be purchased at a cost of $400,000. The equipment would have a five-year useful life (the company uses straight-line depreciation) and a $50,000 salvage value.                         Alternatively,...
A wood products company has decide to purchase new logging equipment for $100,000 with a trade...
A wood products company has decide to purchase new logging equipment for $100,000 with a trade in of its old equipment. The old equipment has a BV of $10,000 at the time of the trade in. The new equipment will be kept for 10 years before being sold. It’s estimated SV at the time is expected to be $5,000. Using the SL method, the BV at the end of the despreciable life is?
A computer manufacturing company is trying to decide whether to purchase specialized assembly equipment today or...
A computer manufacturing company is trying to decide whether to purchase specialized assembly equipment today or to wait 5 years from now, when the equipment will be first needed. If you were to purchase the equipment today it would cost: $403,000 5 years from now the equipment would cost: $634,738 The bank is paying 9.00% interest per year, compounded monthly. Should you buy the equipment now or wait 5 years to buy the equipment?
A company purchased equipment for $100,000 that is expected to have a useful life of 10...
A company purchased equipment for $100,000 that is expected to have a useful life of 10 years and no salvage value. The company sold the equipment at the end of the fourth year of its useful life, at which point it had fair market value of $65,000. If the asset was sold for $55,000 and was being depreciated using the straight line method as was reported at book value, what amount of gain or loss would be reported at the...
Suppose your business borrows $100,000 to purchase a piece of equipment. You will be borrowing the...
Suppose your business borrows $100,000 to purchase a piece of equipment. You will be borrowing the money and repaying it over a three year period with a fixed monthly payment at an annual interest rate of 6%. Construct a loan amortization table for this loan.
Emerson Corp. is trying to decide whether to lease or purchase a piece of equipment needed...
Emerson Corp. is trying to decide whether to lease or purchase a piece of equipment needed for the next five years. The equipment would cost $505,000 to purchase, and maintenance costs would be $20,300 per year. After five years, Emerson estimates it could sell the equipment for $100,500. If Emerson leases the equipment, it would pay $151,900 each year, which would include all maintenance costs. Emerson’s hurdle rate is 15%. (Future Value of $1, Present Value of $1, Future Value...
Emerson Corp. is trying to decide whether to lease or purchase a piece of equipment needed...
Emerson Corp. is trying to decide whether to lease or purchase a piece of equipment needed for the next five years. The equipment would cost $502,000 to purchase, and maintenance costs would be $20,700 per year. After five years, Emerson estimates it could sell the equipment for $100,800. If Emerson leases the equipment, it would pay $152,000 each year, which would include all maintenance costs. Emerson’s hurdle rate is 15%. a. What is the net present value of the cost...
A company is trying to decide whether to bid for a certain contract or not. They...
A company is trying to decide whether to bid for a certain contract or not. They estimate that merely preparing the bid will cost $10000.If their company bids, then they estimate that there is a 50% chance that their bid will be put on the “short-list;” otherwise their bid will be rejected. Once “short-listed” the company will have to supply further detailed information (entailing costs estimated at $5000). After this stage their bid will either be accepted or rejected. The...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT