Advise soc to take or to reject this replacement project

Assignment Help Financial Management

Reference no: EM131999177

The Stodio Olimpico Corporation (SOC) is considering the purchase of a new machine to replace the existing one to increase the productivity of the company in order to save the company from possible bankruptcy.

The existing machine has a book value of $3,000 and can be sold for $4,000 in the market. The old machine is being depreciated on a straight-line basis, and its estimated salvage value 3 years from now is zero. The new machine will reduce costs (before taxes) by $7,000 per year.

The new machine has a 3-year life, its price is $12,000 with an additional installation cost of $2,000, and it can be sold for an expected $2,500 at the end of the third year. The new machine would be depreciated over its 3-year life using the MACRS method.

The new machine will require an increase in net operating working capital of $3,750. SOC's marginal tax rate is 40 percent.

The company uses weight average cost of capital of 12.5 percent to evaluate this project.

Please advise SOC to take or to reject this replacement project. Explain your approach in 5 lines and show your work clearly. Show work.

Reference no: EM131999177

Questions Cloud

Develop a decision analysis formulation for this problem : What the student should do. A group of young ISE students would like to have a party in order to fund their spring break activities;

Project plan - cornerstone securities case study : Project Management - Describe how the group worked together to submit an appropriate Part A Project Plan - Describe the allocation of Part A Project Plan work

Develop a cogent conclusion as to the financial health : A financial statement analysis of the organization utilizing free cash flow, market value added and economic value added.

Why do storage costs increase the price of a futures : Why do storage costs increase the price of a futures contract (F0) while income such as dividends decreases their price?

Advise soc to take or to reject this replacement project : The Stodio Olimpico Corporation (SOC) is considering the purchase of a new machine to replace the existing one to increase.

What percentage of the total assets controlled by all-stores : What percentage of the total assets controlled by All-Stores does its common stock equity? represent?

What is the price of this strips : STRIPS are treasury security and are zero coupon securities. A STRIPS with 10-year maturity has a face value of $1,000. It's offering at YTM of 2.5% currently.

Why the english common law traditionprovides the strongest : Studies show that the legal protection of shareholder rights varies a great deal acrosscountries.

Determine the optimal usage of the companys inventory : Compute the total contribution margin that the company would have earned if all 12,000 lbs. of berries were available - Determine the optimal usage

User Account

All Pages