Wildhorse Inc. wants to purchase a new machine for $38,790, excluding $1,500 of installation costs. The old machine was purchased 5years ago and had an expected economic life of 10 years with no salvage value. The old machine has a book value of $2,200, andWildhorse Inc. expects to sell it for that amount. The new machine will decrease operating costs by $9,000 each year of its economiclife. The straight-line depreciation method will be used for the new machine for a 6-year period with no salvage value.Click here to view PV table.(a)Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.)Cash payback period(b)yearsDetermine the approximate internal rate of return. (Round answer to O decimal places, e.g. 13%. For calculation purposes, use 5 decimalplaces as displayed in the factor table provided.)Internal rate of return%

Capital budgeting refers to the measure to evaluate various projects before investment. For this…

Answered: Wildhorse Inc. wants to purchase a new…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?
Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
BSU Inc. wants to purchase a new machine for $34,608, excluding $1,300 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage value. This old machine now has a book value of $1,900, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $7,800 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a six-year period with no salvage value. Click here to view the factor table. (a) Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.) Cash payback period (b) 4.36 Internal rate of return. Determine the approximate internal rate of return. (Round answer to O decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) years. 19 %
Kendra Company is considering replacing an old machine. The old machine was purchased for $100,700 and has a book value of $40,700 and should last four more years with no salvage value. The company believes that it could currently sell the old machine for $20,700. The new machine cost $80,700 and will have a 4-year life and a $10,700 salvage value. Currently, it costs $20,700 annually to operate the old machine. The new machine is more efficient and should reduce operating cost by 50%. Based on quantitative analysis, should Kendra Company replace the old machine?
Kendra Company is considering replacing an old machine. The old machine was purchased for $100,200 and has a book value of $40,200 and should last four more years with no salvage value. The company believes that it could currently sell the old machine for $20,200. The new machine cost $80,200 and will have a 4-year life and a $10,200 salvage value. Currently, it costs $20,200 annually to operate the old machine. The new machine is more efficient and should reduce operating cost by 50%. Based on quantitative analysis, should Kendra Company replace the old machine? Multiple Choice No, because the relevant cost of the new machine is $20,200 more than the old machine.. No, because the relevant cost of the new machine is $9,400 more than the old machine. Yes, because the relevant cost of the new machine is $19,800 less than the old machine. Yes, because the relevant cost of the new machine is $9,800 less than the old machine. X
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $59,000. The machine would replace an old plece of equipment that costs $15,000 per year to operate. The new machine would cost S7,000 per year to operate. The old machine currently In use could be sold now for a salvage value of $25,000. The new machine would have a useful life of 10 years with no salvage value. Requlred: 1. What Is the annual depreclation expense associated with the new bottling machine? 2. What Is the annual Incremental net operating Income provided by the new bottling machine? 3. What is the amount of the Initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place I.e. 0.123 should be consldered as 12.3%.) 1. Depreciation expense 2. Incremental net operating income Initial investment 4. Simple rate of return %
BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage value. This old machine now has a book value of $2,000, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $7,000 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a six-year period with no salvage value. Click here to view the factor table. (a) Determine the cash payback period. (Round cash payback period to 2 decimal places, e.g. 10.53.) Cash payback period (b) Determine the approximate internal rate of return. (Round answer to O decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal rate of return (c) years The investment Assuming the company has a required rate of return of 10%, determine whether the new machine…

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