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Norman Industrial Company (NIC) is considering the replacement of an existing machine. The new machine costs $2.3 million and requires installation costs of $250,000. The existing machine can be sold currently for $1,250,000 before taxes. It is 3 years old, costs $1,500,000 new, and has a $435,000 book value and a remaining useful life of 5 years. It is being depreciated under MACRS using a 5-year recovery period (see table, bottom of page 9 of exam) and therefore has the final 3 years of depreciation remaining. If the old machine is held for 5 more years, its market value will fall to zero by the end of that time. Both the new and the old machine will yield revenues of $2,000,000 per year, but the old machine will have operating costs of $1,600,000 annually, while the new machine’s annual operating costs are only $1,000,000. Over its 5-year operating life, the new machine should reduce operating costs by $600,000 per year. The new machine will also be depreciated under a 5-year MACRS recovery period. The new machine can be sold for $500,000 net of removal and clean-up costs at the end of 5 years. An increased investment of $50,000 will be needed to support operations if the new machine is acquired. Assume that the firm has adequate operating income against which to deduct any loss experienced on the sale of the existing machine. The firm has a 10% cost of capital and is subject to a tax rate of 30% on both ordinary and capital gains. a. Calculate the initial investment associated with this replacement decision. b. Calculate the incremental operating cash inflows associated with this decision. c. Calculate the terminal cash flow at the end of year 5 associated with this decision. d. Calculate the net present value for this project and recommend whether to accept or reject.
Current annualized yields on 1 year US treasury securities are only .28%....while current annualized yields on 2year US treasury securities are .69% (note you may assume that both 1 and 2year securities in this example are “0” coupon securities with ..
Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding th..
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Describe the concept of market efficiency. In what sense is the concept an important part of the shareholders wealth maximization objective.
Janet Boyle intends to deposit $300 per year in a credit union for the next 10 years, and the credit union pays an annual interest rate of 8%. Determine the future value that Janet will have at the end of 10 years, given that end-of- period deposits ..
You want to have $20,000 for the down payment on a house in 10 years. Your parents have promised to give you $3,000 in two (2) years. How much do you need to set aside today if you can earn an 8% APR with monthly compounding on the money you save and..
Bond value and changing required returns Midland Utilities has outstanding a bond issue that will mature to its $1,000 par value in 12 years. The bond has a coupon interest rate of 11% and pays interest annually. Plot your findings in part a on a set..
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $12,000 face value that matures in one year. The current market value of the firm’s assets is $13,800. What is the value of the firm’s equity and debt if Project A is undertaken? What ..
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $510 per month. You will charge .91 percent per month interest on the overdue balance. Required: If the current balance is $14,730,..
The Health care issue is a great topic of debate between people these days. Conduct research about the current Health Care reform law and how it could affect your personal financial plan?
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