Question

In: Finance

Tetley Company is considering acquiring a new machine. The machine would cost $120,000 and it would...

Tetley Company is considering acquiring a new machine. The machine would cost $120,000 and it would cost another $30,000 to modify the machine and get it installed and ready for operations.

The machine falls into class 8 with a 20% CCA rate and it would be sold after 3 years for $50,000. The machine would require an immediate increase of $8,000 in operating net working capital. The balance of operating net working capital would remain unchanged during the project and be recovered after 3 years. The machine would have no effect on revenues, however the machine is expected to save the company $62,000 per year in before-tax operating costs.

The company’s tax rate is 30%. The project has a required rate of return of 12% per year compounded annually.

What is the NPV of the project?

(Note: To get full marks you must show your work. If you are using the table approach you must show the numbers for year 0 to year 3. In addition you must show the calculation or function you used to arrive at the final answer. If you are using the formula, recipe or list approach you must show each step in the approach.)

Solutions

Expert Solution

Use a spreadsheet for the ease in computations. Enter the values and the formulas in the spreadsheet as shown in the image below.

The obtained result is provided below.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and would be depreciated for tax purposes using the straight-line method over an estimated ten-year life to its expected salvage value of $20,000. The new machine would require an addition of $30,000 to working capital. In each year of Machine A’s life, the company would reduce its pre-tax costs by $40,000. The company has a 12% cost of capital and is in the 35% marginal...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and would be depreciated for tax purposes using the straight-line method over an estimated ten-year life to its expected salvage value of $20,000. The new machine would require an addition of $30,000 to working capital. In each year of Machine A’s life, the company would reduce its pre-tax costs by $40,000. The company has a 12% cost of capital and is in the 35% marginal...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and...
A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and would be depreciated for tax purposes using the straight-line method over an estimated ten-year life to its expected salvage value of $20,000. The new machine would require an addition of $30,000 to working capital. In each year of Machine A’s life, the company would reduce its pre-tax costs by $40,000. The company has a 12% cost of capital and is in the 35% marginal...
A company is considering purchasing a new machine that would cost $60,000 and the machine would...
A company is considering purchasing a new machine that would cost $60,000 and the machine would be depreciated (straight line) down to $0 over its four year life. At the end of four years it is believed that the machine could be sold for $12,000. The machine would increase EBDT by $42,000 annually. the company's marginal tax rate is 34%. What the RATFCF’s associated with the purchase of this machine? $31,800 $32,820 $30,452 $29,940
A firm is considering the purchase of a new machine at a price of $120,000.  The machine...
A firm is considering the purchase of a new machine at a price of $120,000.  The machine falls into the three-year MACRS class. If the new machine is acquired, the firm's investment in net working capital will immediately increase by $15,000 and then remain at that level throughout the life of the project. At the end of 3 years, the new machine can be sold for $5,000. Earnings before depreciation, interest and taxes (EBDIT) are expected to be as follows with...
Rex Berhad is considering buying a new production machine. The proposed machine would cost the company...
Rex Berhad is considering buying a new production machine. The proposed machine would cost the company RM85,000 and require an installation and modification cost of RM1,500 to be installed properly. In addition, the new machine would require an increase of inventory and account payable of RM 3 000 and RM1 700 respectively. The new machine will be depreciated over its five year life using the simplified straight line method. By using the new machine, sales is expected to increase by...
A company is considering a new inventory system that will cost $120,000. The system is expected...
A company is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year 1, $55,000 in year 2, $65,000 in year 3, and $40,000 in year 4. The firm’s required rate of return is 9%. What is the payback period of this project? 1.95 years 2.46 years 2.99 years 3.10 years --------- What is the net present value (NPV) of...
A company is considering the purchase of a new machine. The machine will cost $14,000, will...
A company is considering the purchase of a new machine. The machine will cost $14,000, will result in an annual savings of $1750 with a salvage value of $500 at the end of 12 years. For a MARR of 7%, what is the benefit to cost ratio? Question options: 0.63 8.25 1.36 1.01
Company XYZ is considering investing in a new machine that will cost $15,000. The machine will...
Company XYZ is considering investing in a new machine that will cost $15,000. The machine will allow the firm to generate sales of $50,000 per year. The machine will have a life of 3 years. The operating expenses of XYZ are projected to be 70% of total sales. The machine will be depreciated on a straight-line basis to a zero salvage value. The market value of the machine in three years is estimated to be $5,000. The marginal tax rate...
Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost...
Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $228,168 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $33,500. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 5%....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT