Question

In: Finance

There is an opportunity to expand the existing business by purchasing a new machinery for production....

There is an opportunity to expand the existing business by purchasing a new machinery for production. The machinery costs $500,000 and will be depreciated on straight-line basis to zero over 5 years. If the machinery will increase the operating profit before depreciation by $150,000, $160,000, $170,000, $180,000, and $200,000 over these 5 years. What is the average accounting rate of return for the new machinery? Assume the machine is purchased with all equity and the tax rate is 30%.

Solutions

Expert Solution

The formulas and the inputs used is as follows:


The result is as follows:


jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A company is considering purchasing a new second machine in order to expand their business. The...
A company is considering purchasing a new second machine in order to expand their business. The information for the new machine is: Cost= $100,000 Increase in contribution margin= $25,000 Life of the machine= 5 years Required rate of return = 10% Calculate the following: a. Net present value (NPV) (Use factors to three decimal places, X.XXX, and use a minus sign or parentheses for a negative net present value. Enter the net present value of the investment rounded to the...
You must decide wither to buy new machinery to produce X or to modify existing machinery....
You must decide wither to buy new machinery to produce X or to modify existing machinery. If you have no idea of the economic probabilities of the two different states of nature: (1) Economic outlook is good, and (2) Economic outlook is bad. Use a probability of the economy being bad of 20%. Payoff Table Economic Outlook ($1,000) Good Bad Buy a new machine $750 −$175 Modify an old machine $500 $200 *In the payoff table, a negative number (−)...
Carolyn Nesbitt, the CEO of Macrocorp, is considering a project to expand the existing business into...
Carolyn Nesbitt, the CEO of Macrocorp, is considering a project to expand the existing business into a new product line that involves considerable up-front investments in new equipment as well as an initial investment in net operating working capital. Her executives’ cash flow projections are fairly aggressive with $500 M in sales at the end of the first year increasing by 5% annually for the next five years. Cost of goods sold is expected to be $250M in the first...
Carolyn Nesbitt, the CEO of Macrocorp, is considering a project to expand the existing business into...
Carolyn Nesbitt, the CEO of Macrocorp, is considering a project to expand the existing business into a new product line that involves considerable up-front investments in new equipment as well as an initial investment in net operating working capital. Her executives’ cash flow projections are fairly aggressive with $500 M in sales at the end of the first year increasing by 5% annually for the next five years. Cost of goods sold is expected to be $250M in the first...
Karl inc. has an opportunity to expand one of its production facilities at a cost of...
Karl inc. has an opportunity to expand one of its production facilities at a cost of $425000. If the expansion is undertaken Karl inc. expects their income will increase by $102000 the first year and then increase by $6000 each year after that. The annual expenses are expected to be $10000 the first year and increase by $1500 each year after that. The company will depreciate the equipment using a 5 year MACRS (20%, 32%, 19.2%, 11.52%, 11.52%, and 5.75%)...
A company is considering purchasing a special machine to expand one of its production lines. The...
A company is considering purchasing a special machine to expand one of its production lines. The machine costs $1,000,000 and has an estimated service life of 3-years. Annual after-tax revenues are expected to be $430,000 and the salvage value of the machine at the end of the third year, could be $40,000. To maximize its ROI, the company is considering borrowing the full purchase amount from a local bank at 12% annual interest, instead of funding the purchase from its...
Onta Enterprises is seeking to expand operations and is considering increasing production capacity by purchasing the...
Onta Enterprises is seeking to expand operations and is considering increasing production capacity by purchasing the latest plant and equipment.  The following two plants are being considered for acquisition as they are technically superior to the current plant and will enable higher production volumes with lower cost inputs.  The finance department has projected the cash flows for the life of the plant and has asked you as the investment manager to advise the Board on which of these plants to acquire. Onta’s...
Onta Enterprises is seeking to expand operations and is considering increasing production capacity by purchasing the...
Onta Enterprises is seeking to expand operations and is considering increasing production capacity by purchasing the latest plant and equipment. The following two plants are being considered for acquisition as they are technically superior to the current plant and will enable higher production volumes with lower cost inputs. The finance department has projected the cash flows for the life of the plant and has asked you as the investment manager to advise the Board on which of these plants to...
YTL wishes to evaluate an investment in new production machinery. The machinery will enable the company...
YTL wishes to evaluate an investment in new production machinery. The machinery will enable the company to satisfy increasing demand for existing products; yet, the investment is not expected to lead to any change in the existing level of business risk of the company. The machinery will cost RM5 million and is not expected to have any scrap value. This will produce net annual after-tax cash flows of RM0.8 million into perpetuity. YTL has, in issue, 5 million shares with...
Magic Tyme is considering using existing machinery to produce a new magic kit. Which of the...
Magic Tyme is considering using existing machinery to produce a new magic kit. Which of the following items should be included in the analysis of the new product? I. Developing the product cost $50,000 II. Magic Tyme already sells a similar, but not identical, product III. The new product will be sold on credit IV. The fixed cost of the machinery is $20,000 per year A. II and III only B. II and IV only C. I, II, and III...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT