Question
In: Finance
A company is considering the purchase of a major piece of equipment for its manufacturing plant....
A company is considering the purchase of a major piece of equipment for its manufacturing plant. The project would cost $22m in initial investment and would result in cost savings, before tax, of $3.25m per year for five years.
The equipment could be sold for $4.5m at the end of the five years. The equipment would also result in an increase in NWC of $500,000, which will be recovered at the end of the project.
The company’s CCA rate is 25% and the corporate tax rate is 34%.
The company’s target capital structure is 70% equities and 30% debt.
The cost of equity is 12% while the cost of debt before tax is 5%.
WACC= 9.39%
Calculate NPV. Should the company go ahead with the purchase?
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Solutions
jeff jeffy answered 1 year agoRelated Solutions
A company is considering the purchase of a major piece of equipment for its manufacturing plant....
A company is considering the purchase of a major piece of
equipment for its manufacturing plant. The project would cost $22m
in initial investment and would result in cost savings, before tax,
of $3.25m per year for five years. The equipment could be sold for
$4.5m at the end of the five years. The equipment would also result
in an increase in NWC of $500,000, which will be recovered at the
end of the project. The company’s CCA rate is...
A piece of equipment used in a manufacturing plant that costs 220,000 to purchase has the...
A piece of equipment used in a manufacturing plant that costs
220,000 to purchase has the economic data shown in the table below
including the market value if the equipment was sold at the end of
the period of use. Apply an interest rate of 9.0% to answer the
questions that follow the data.
Period
1
2
3
4
5
Operating Cost
45,000
56,000
70,000
85,000
98,000
Market Value
160,000
125,000
105,000
45,000
15,000
a. What is the period cost...
Bernie Ltd is considering the purchase of a new equipment for its manufacturing plant and has...
Bernie Ltd is considering the purchase of a new equipment for
its manufacturing plant and has asked you to work out an
appropriate discount rate to use when evaluating the project.
information about burnie’s current capital structure is as
follows:
Source of capital. Book value. Market value
debts. $1,500,000. $1,600,000
ordinary share capital. $1,800,000. $3,000,000
total. $3,300,000. $3,600,000
to finance the purchase, Bernie can sell 10 year-bonds paying
annual coupon interest at a rate of 6%. The bond can be...
An Engineering company is considering purchasing a piece of plant equipment and wishes to compare its...
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initial cost is $170,000 with immediate payment required. Running
Costs including maintenance are $12,000 in year 1, $17,000 in year
2, $24,000 in year 3 and $33,000 in year 4. Payments are required
at the end of each year. Interest rates are 4% p.a. The equipment
will have a salvage value...
An Engineering company is considering purchasing a piece of plant equipment and wishes to compare its...
An Engineering company is considering purchasing a piece of
plant equipment and wishes to compare its replacement strategies
for purchase and maintenance over a period of time. The machine’s
initial cost is $160,000 with immediate payment required. Running
Costs including maintenance are $11,000 in year 1, $16,000 in year
2, $23,000 in year 3 and $32,000 in year 4. Payments are required
at the end of each year. Interest rates are 4% p.a. The equipment
will have a salvage value...
A company is considering the purchase of a piece of equipment that would cost $380,000 and...
A company is considering the purchase of a piece of equipment
that would cost $380,000 and would last for 8 years. At the end of
8 years, the equipment would have a salvage value of $97,500. The
equipment would provide annual cost savings of $85,000. The company
requires a minimum pretax return of 12% on all investment projects.
(Ignore income taxes.)
Required:
Provide your Excel input and the final net present value amount
you calculated. (If a variable is not...
6) Company is considering the purchase of a piece of equipment in '12. The projected cost...
6)
Company is considering the
purchase of a piece of equipment in '12.
The projected cost of the equipment is
50,000
The equipment will be depreciated via the MACRS - 5
year life
This equipment is expected to generate the
following economics:
Revenue for first year will be
45,700
Revenue will increase by
1.0%
per year thereafter
Expenses for first year will be
29,700
Expenses will decrease by
1.0%
per year thereafter
Company's Capital Structure is as follows:...
Harriman Manufacturing Company is evaluating the purchase of a new piece of equipment. The quoted price...
Harriman Manufacturing Company is evaluating the
purchase of a new piece of equipment. The quoted price is $50,000,
and it would cost Harriman another $ 10,000 for related capital
costs such as transportation and equipment modification for special
use. The total investment would fall into MACRS three year class
with depreciation rates being applied to the full capitalized costs
not excluding salvage at 33%, 45%, 15% and 7% in years 1-4,
respectively. Harriman expects that the equipment would be sold...
Harriman Manufacturing Company is evaluating the purchase of a new piece of equipment. The quoted price...
Harriman Manufacturing Company is evaluating the purchase of a
new piece of equipment. The quoted price is $50,000, and it would
cost Harriman another $ 10,000 for related capital costs such as
transportation and equipment modification for special use. The
total investment would fall into MACRS three year class with
depreciation rates being applied to the full capitalized costs not
excluding salvage at 33%, 45%, 15% and 7% in years 1-4,
respectively. Harriman expects that the equipment would be sold...
A hospital is considering the purchase of a piece of medical equipment that costs $1,500,000 and...
A hospital is considering the purchase of a piece of medical
equipment that costs $1,500,000 and has a useful life of five years
and no salvage value at the end of its useful life. The equipment
generates revenues of $650,000 per year and operating expenses of
$300,000. Calculate NPV, payback, BCR, and IRR, should the
equipment be purchased if the discount rate is 6% or 10%?
Revenue Expense
Year 0 -
$1,500,000 (investment)
...
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