Question

In: Finance

1. Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a...

1.

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $883,200 is estimated to result in $294,400 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $128,800. The press also requires an initial investment in spare parts inventory of $36,800, along with an additional $5,520 in inventory for each succeeding year of the project.

Required :

If the shop's tax rate is 34 percent and its discount rate is 8 percent, what is the NPV for this project? (Do not round your intermediate calculations.)

2.

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,100,000 and will last for 4 years. Variable costs are 38 percent of sales, and fixed costs are $150,000 per year. Machine B costs $4,310,000 and will last for 7 years. Variable costs for this machine are 27 percent of sales and fixed costs are $115,000 per year. The sales for each machine will be $8.62 million per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis.

a)

If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A? (Do not round your intermediate calculations.)

b)

If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B? (Do not round your intermediate calculations.)

3.

Suppose a stock had an initial price of $67 per share, paid a dividend of $1.55 per share during the year, and had an ending share price of $82. Compute the percentage total return.

4.

A stock had returns of 13 percent, 13 percent, 14 percent, -10 percent, 19 percent, and 8 percent over the last six years.

a)

What is the arithmetic return for the stock?

b)

What is the geometric return for the stock?

5.

Returns
Year X Y
1 16 % 22 %
2 30 31
3 11 12
4 23 28
5 10 22

Using the returns shown above, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y. (Do not round intermediate calculations. Enter your average return and standard deviation as a percent rounded to 2 decimal places, e.g., 32.16, and round the variance to 5 decimal places, e.g., 32.16161.)


x Y
Average Return % %

Variance

Standard Deviation % %

Solutions

Expert Solution

1)

Depreciation
Year Rate Depreciation = $883200 x Dep. Rate
1 20.00% $176,640.00
2 32.00% $282,624.00
3 19.20% $169,574.40
4 11.52% $101,744.64
Total Depreciation $730,583.04
The book value of the equipment at the end of the project = $883,200 - $730,583.04 $152,616.96
After-tax salvage value = $128,800 + ($152,616.96 – 128,800)(0.34) $136,897.77
Year 0 1 2 3 4
Annual pretax cost savings $294,400.00 $294,400.00 $294,400.00 $294,400.00
Less: Depreciation -$176,640.00 -$282,624.00 -$169,574.40 -$101,744.64
EBT $117,760.00 $11,776.00 $124,825.60 $192,655.36
Less: Tax @ 34% -$40,038.40 -$4,003.84 -$42,440.70 -$65,502.82
Net Income $77,721.60 $7,772.16 $82,384.90 $127,152.54
Add: Depreciation $176,640.00 $282,624.00 $169,574.40 $101,744.64
Operating Cash Flow $254,361.60 $290,396.16 $251,959.30 $228,897.18
Initial Investment -$883,200.00
Net Working Capital -$36,800.00 -$5,520.00 -$5,520.00 -$5,520.00 $53,360.00
After Tax Salvage Value $136,897.77
Net Operating Cash Flow -$920,000.00 $248,841.60 $284,876.16 $246,439.30 $419,154.94
PV @ 8% 1 0.9259 0.8573 0.7938 0.7350
Present Value -$920,000.00 $230,408.89 $244,235.39 $195,631.46 $308,091.40
NPV $58,367.14

Related Solutions

Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,132,800 is estimated to result in $377,600 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $165,200. The press also requires an initial investment in spare parts inventory of $47,200, along with an additional $7,080 in inventory for each succeeding year...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $950,400 is estimated to result in $316,800 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $138,600. The press also requires an initial investment in spare parts inventory of $39,600, along with an additional $5,940 in inventory for each succeeding year...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $566,400 is estimated to result in $188,800 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $82,600. The press also requires an initial investment in spare parts inventory of $23,600, along with an additional $3,540 in inventory for each succeeding year...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,152,000 is estimated to result in $384,000 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $168,000. The press also requires an initial investment in spare parts inventory of $48,000, along with an additional $7,200 in inventory for each succeeding year...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $969,600 is estimated to result in $323,200 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $141,400. The press also requires an initial investment in spare parts inventory of $40,400, along with an additional $6,060 in inventory for each succeeding year...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $844,800 is estimated to result in $281,600 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $123,200. The press also requires an initial investment in spare parts inventory of $35,200, along with an additional $5,280 in inventory for each succeeding year...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $547,200 is estimated to result in $182,400 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $79,800. The press also requires an initial investment in spare parts inventory of $22,800, along with an additional $3,420 in inventory for each succeeding year...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $547,200 is estimated to result in $182,400 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $79,800. The press also requires an initial investment in spare parts inventory of $22,800, along with an additional $3,420 in inventory for each succeeding year...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $1,094,400 is estimated to result in $364,800 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $159,600. The press also requires an initial investment in spare parts inventory of $45,600, along with an additional $6,840 in inventory for each succeeding year...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new...
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $681,600 is estimated to result in $227,200 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $99,400. The press also requires an initial investment in spare parts inventory of $28,400, along with an additional $4,260 in inventory for each succeeding year...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT