Question

In: Accounting

Orange Company is considering the purchase of some equipment. The initial investment will be $42,000. The...

Orange Company is considering the purchase of some equipment. The initial investment will be $42,000. The estimated useful life of the equipment will be 5 years, at which point it will have a zero salvage value.

The annual savings in cash operating costs will equal $12,500, and the company has a minimum required rate of return of 12 percent. Use straight-line depreciation, and ignore income taxes.

            Compute (Show all calculations):

  1. Net present value
  2. Internal rate of return
  3. Payback period
  4. Accounting rate of return using initial investment
  5. Should Orange purchase the equipment? Explain why or why not

Solutions

Expert Solution

For any queries please comment.

If you are satisfied by the solution please click the LIKE Thumb


Related Solutions

Firm A is considering the purchase of copying equipment that will require an initial investment of$15,000...
Firm A is considering the purchase of copying equipment that will require an initial investment of$15,000 and $4,000 per year in annual operating costs over the equipment’s estimated useful life of 5 years. The company will use a discount rate of 8.5%. What is the equivalent annual cost?
A company is considering the purchase of some equipment. The equipment costs $1,600,000. It lasts for...
A company is considering the purchase of some equipment. The equipment costs $1,600,000. It lasts for 4 years, and would be depreciated straight line to a zero salvage value. Alternatively, the company could lease the equipment for 4 years. The leasing contract would include maintenance, and the lease payments would be due at the end of each of the four years. The company’s before-tax cost of debt is 10%. The tax rate is 40%. What is the breakeven lease payment...
The management of Kunkel Company is considering the purchase of a $42,000 machine that would reduce...
The management of Kunkel Company is considering the purchase of a $42,000 machine that would reduce operating costs by $9,500 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 11%. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference...
A firm can purchase new equipment for a ​$150,000 initial investment.
NPV and maximum return    A firm can purchase new equipment for a ​$150,000 initial investment. The equipment generates an annual​ after-tax cash inflow of ​$44,400 for 4 years. a. Determine the net present value ​ (NPV​) of the​ asset, assuming that the firm has a cost of capital of 10​%. Is the project​ acceptable? b. Determine the maximum required rate of return that the firm can have and still accept the asset.
Wansley Lumber is considering the purchase of a paper company, which would require an initial investment...
Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. a. Should Wansley purchase the paper company? b. Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50...
Your company is considering a new 3-year project that requires an initial investment in equipment of...
Your company is considering a new 3-year project that requires an initial investment in equipment of $3 million. Prior to this, you had engaged a consultant to study the feasibility of the new project and after an extensive market survey, the consultant confirmed your belief that the project would be viable. Your company is charged $100,000 for the feasibility study. The equipment will be depreciated straight line to zero over the 3 years of its useful life. In addition, you...
Your company is considering an investment that would involve the following initial outlays: cost of equipment:...
Your company is considering an investment that would involve the following initial outlays: cost of equipment: $275467, installation: $28020, and change in NOWC: $37216. The equipment is classified to be depreciated according to the MACRS 3-year table, with the following depreciation schedule: year 1 = 33%, year 2 = 45%, year 3 = 15%, year 4 = 7%. What is the depreciation expense in year 2?
Your company is considering a new 3-year project that requires an initial investment in equipment of...
Your company is considering a new 3-year project that requires an initial investment in equipment of $3 million. Prior to this, you had engaged a consultant to study the feasibility of the new project and after an extensive market survey, the consultant confirmed your belief that the project would be viable. Your company is charged $100,000 for the feasibility study. The equipment will be depreciated straight line to zero over the 3 years of its useful life. In addition, you...
PDQ Corporation is considering an investment proposal that requires an initial investment of $100,000 in equipment....
PDQ Corporation is considering an investment proposal that requires an initial investment of $100,000 in equipment. Fully depreciated existing equipment may be disposed of for $30,000 pre-tax. The proposed project will have a five-year life and is expected to produce additional revenue of $45,000 per year. Expenses other than depreciation will be $12,000 per year. The new equipment will be depreciated to zero over the five-year useful life, but it is expected to actually be sold for $25,000. PDQ has...
A company is considering whether to lease or purchase some specialized equipment. The capital budgeting analysis...
A company is considering whether to lease or purchase some specialized equipment. The capital budgeting analysis indicating the equipment should be secured already has not been completed. The equipment has a five-year economic and tax life, and the company uses a straight-line depreciation method. The equipment costs $1,000,000 if purchased or it can be leased for five-years at $280,000 per year. The first lease payment is payable in advance. The equipment’s salvage value is estimated to be $100,000. Revenue is...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT