Question
In: Finance
A company is considering the purchase of equipment costing $84000 which will permit it to reduce...
A company is considering the purchase of equipment costing $84000 which will permit it to reduce its existing labour cost by $21000 each year for twelve years. The company estimates that it will have to spend $2000 every two years overhauling the equipment. The equipment may be depreciated using straight line depreciation over 12 years for tax purposes. The company tax rate is 30 cents in the dollar and the after corporate tax cost of capital is 10% per annum.
Assume:
1. Salvage value of zero.
2. The outlay of $84000 occurs at time zero.
3. All other cash flows including, tax payments and credits are made at the end of the year.
4. No overhaul is required in year 12.
What is the NPV to the nearest dollar? Be careful not to round until the last calculation.
This question has been answered previously but the calculation is wrong.
Solutions
Expert Solution
NPV= $26374
Workings
Labour cost saving is after tax = 21000*(1-30%)
Overhaul cost is after tax
Tax shield on depreciation = Initial cost*Tax rate/12
| Year | Initial cost | Labour cost after tax | Overhaul cost | Tax shield on depreciation | Net cash flow |
| 0 | -84000 | -84000 | |||
| 1 | 14700 | 2100 | 16800 | ||
| 2 | 14700 | -1400 | 2100 | 15400 | |
| 3 | 14700 | 2100 | 16800 | ||
| 4 | 14700 | -1400 | 2100 | 15400 | |
| 5 | 14700 | 2100 | 16800 | ||
| 6 | 14700 | -1400 | 2100 | 15400 | |
| 7 | 14700 | 2100 | 16800 | ||
| 8 | 14700 | -1400 | 2100 | 15400 | |
| 9 | 14700 | 2100 | 16800 | ||
| 10 | 14700 | -1400 | 2100 | 15400 | |
| 11 | 14700 | 2100 | 16800 | ||
| 12 | 14700 | 2100 | 16800 | ||
| NPV | 26373.64 |
jeff jeffy answered 1 year agoRelated Solutions
A company is considering purchasing equipment costing $ 92,000. The equipment is expected to reduce costs...
A company is considering purchasing equipment costing $ 92,000.
The equipment is expected to reduce costs from year 1 to 3 by
$22,000, year 4 to 9 by $9,000,and in year 10 by $2,000. In year
10, the equipment can be sold at a salvage value of $15,000.
Calculate the internal rate of return (IRR) for this
proposal.
1. Jumbo Industries is considering the purchase of equipment costing $80,000. The company has a 12%...
1.
Jumbo Industries is considering the purchase of equipment costing
$80,000. The company has a 12% required minimum rate of return. The
equipment is expected to generate $20,000 in additional operating
income. Jumbo’s tax rate is 25% and it’s weighted-average cost of
capital is 12%. What is the equipment’s EVA?
A) 7,200
B) 5,400
C) 9,600
D) 2,400
2. People’s Construction Company has set a 15% required
minimum rate of return. The company’s CFO is considering investing
in a $125,000...
“MLK Co” is a manufacturing company which is considering the purchase of a new equipment. The...
“MLK Co” is a manufacturing company which is considering the
purchase of a new equipment. The below given summarizes all the
information related to the equipment:
-Equipment’s price: $180,000 -Shipping: $20,000
-Payment to find a good place to install the equipment:
$30,000
-Useful Life : 4 years
-Depreciation Method: MACRS – 3 year class
-Total Revenues/ year: $100,000 -Operating costs (Excluding
Depreciation)/year: $25,000
-Salvage Value: $10,000 -Increase in Current Asset: $23,000
-Increase in Current liabilities (Except N/P): $8,000 -WACC: 9%...
Bluebonnet inc is considering the purchase of new equipment that will automate production and thus reduce...
Bluebonnet inc is considering the purchase of new equipment that
will automate production and thus reduce labor costs. Bluebonnet
made the following estimates related to the new machinery.
Bluebonnet
Cost of the equipment
$ 151 comma 000$151,000
Reduced labor costs
$ 45 comma 000$45,000
Estimated life of the equipment
1010
years
Terminal disposal value
?$0
?After-tax cost of capital
88
?%
Tax rate
3535
?%
Assume depreciation is calculated on a? straight-line basis for
tax purposes. Assume all cash flows...
(LO 10) Poe Company is considering the purchase of new equipment costing $81,000. The projected annual...
(LO 10) Poe Company is
considering the purchase of new equipment costing $81,000. The
projected annual cash inflows are $31,200, to be received at the
end of each year. The machine has a useful life of 4 years and no
salvage value. Poe requires a 10% return on its investments. The
present value of $1 and present value of an annuity of $1 for
different periods is presented below. Compute the net present value
of the machine.
Periods
Present Value...
(LO 10) Poe Company is considering the purchase of new equipment costing $81,000. The projected annual...
(LO 10) Poe Company is
considering the purchase of new equipment costing $81,000. The
projected annual cash inflows are $31,200, to be received at the
end of each year. The machine has a useful life of 4 years and no
salvage value. Poe requires a 10% return on its investments. The
present value of $1 and present value of an annuity of $1 for
different periods is presented below. Compute the net present value
of the machine.
Periods
Present Value...
Monty Industries is considering the purchase of new equipment costing $1,300,000 to replace existing equipment that...
Monty Industries is considering the purchase of new equipment
costing $1,300,000 to replace existing equipment that will be sold
for $194,000. The new equipment is expected to have a $223,000
salvage value at the end of its 4-year life. During the period of
its use, the equipment will allow the company to produce and sell
an additional 32,600 units annually at a sales price of $27 per
unit. Those units will have a variable cost of $15 per unit. The...
Your company is considering a project which will require the purchase of $685,000 in new equipment....
Your company is considering a project which will require the
purchase of $685,000 in new equipment. The company expects to sell
the equipment at the end of the project for 25% of its original
cost, but some assets will remain in the CCA class. Annual sales
from this project are estimated at $244,000. Initial net working
capital equal to 30.50% of sales will be required. All of the net
working capital will be recovered at the end of the project....
Your company is considering a project which will require the purchase of $715,000 in new equipment....
Your company is considering a project which will require the
purchase of $715,000 in new equipment. The company expects to sell
the equipment at the end of the project for 25% of its original
cost, but some assets will remain in the CCA class. Annual sales
from this project are estimated at $256,000. Initial net working
capital equal to 32.00% of sales will be required. All of the net
working capital will be recovered at the end of the project....
Your company is considering a project which will require the purchase of $725,000 in new equipment....
Your company is considering a project which will require the
purchase of $725,000 in new equipment. The company expects to sell
the equipment at the end of the project for 25% of its original
cost, but some assets will remain in the CCA class. Annual sales
from this project are estimated at $260,000. Initial net working
capital equal to 32.50% of sales will be required. All of the net
working capital will be recovered at the end of the project....
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Use the bond term's below to answer the question Maturity 7 years Coupon Rate 4% Face...
- What experience have you had with Organization Development or with Change Management? Describe the organization, the...
- 1. Renfro Rentals has issued bonds that have a 12% coupon rate, payable semiannually. The bonds...
- Given an array of positive integers a, your task is to calculate the sum of every...
- Define “culture.” Software is defined by the Merriam-Webster Dictionary as "the programs that run on a...
- In humans, hypotrichosis (sparse body hair) is a rare autosomal recessive condition. Let h = hypotrichosis...
- Increase all of the listing prices by 5% for all listings under $500,000 and 10% for...
ADVERTISEMENT