Asset replacement project of replacing control device

Assignment Help Financial Management

Reference no: EM132057546

Cranberry Manufacturing Company is considering an asset replacement project of replacing a control device. This old control device has been fully depreciated but can be sold for $4,000. The new control device, which is more automated, will cost $34,000. The new device’s installation and shipping costs will total $14,000. The new device will be depreciated on a straight-line basis over its 2-year economic life to an estimated salvage value of $0. The actual salvage value of this device at the end of 2-year period (That is, the market value of the device at the end of 2-year period) is estimated to be $5,000. If the replacement project is accepted, Cranberry will require an initial working capital investment of $2,500 (that is, adding $2,500 initially to its net working capital).

During the 1st year of operations, Cranberry expects its annual revenue to increase from $65,500 to $85,000. After the 1st year, revenues from the replacement are expected to increase at a rate of $3,200 a year for the remainder of the project life.

Cranberry's incremental operating costs associated with the replacement project are expected to decrease from $25,000 to $17,000 during the 1st year and increase at a rate of $2500 for the remainder of the project life.

Cranberry expects that it will have to add about $3,000 to its net working capital in year 1, and nothing in year 2. At the end of the project, the total accumulated net working capital required by the project will be recovered.

Cranberry has a marginal tax rate of 30%. What is the initial net investment for Cranberry to undertake this replacement project?

$42,100

$41,900

$47,900

$47,700

Continued from Question 10, what are net operating cash flows at the end of year 1 and at the end of year 2 respectively? Net operating cash flow at the end of year 1 is $23,450 and that at the end of year 2 is $35,940.

Net operating cash flow at the end of year 1 is $21,900 and that at the end of year 2 is $33,820.

Net operating cash flow at the end of year 1 is $23,275 and that at the end of year 2 is $35,480.

Net operating cash flow at the end of year 1 is $22,225 and that at the end of year 2 is $34,430.

Reference no: EM132057546

Questions Cloud

Likely financing policy for rapidly growing business : Which of the following is NOT a likely financing policy for a rapidly growing business?

How the given differences might impact social work : Western cultures think of time in linear terms while other cultures perceive the passage of time in cyclical terms (Helman, 2005).

Illustrate the principles of which leadership approach : The following quote from Lao-Tzu, was used in class to illustrate the principles of which leadership approach? "The highest type of ruler is one of

Organisational development change process roles : 1. What are the 5-keys organisational development change process roles?

Asset replacement project of replacing control device : Cranberry Manufacturing Company is considering an asset replacement project of replacing a control device.

Analyze the most striking features of the statistics : Patient harm events happen at an alarming rate, but resources are available to consumers to help them make informed decisions about the care they receive.

Applicant needing extensive training for the position : When hiring for a new position, should an experienced and skilled applicant be hired instead of an applicant needing extensive training for the position?

Characteristics of the four stages of team building : What's the general characteristics of the four stages of team building: forming, storming, norming and performing.

Decline in business because of competition : A company is experiencing decline in business because of competition. The manager thinks they may be able to turn the company around if they can get help

User Account

All Pages