Considering whether to expand widget production

Assignment Help Financial Management

Reference no: EM131523300

MBA Corp is considering whether to expand widget production. This would require the purchase of a new widget-producing machine at a cost of $5,400,000. The machine would produce 450,000 widgets per year during its useful life of three years, and would be depreciated for tax purposes at a rate of $1,800,000 per year. The machine would not have any salvage value. Expanding widget production would also require the use of a building that could otherwise be leased for $500,000 per year. Working capital required for the new machine would be 12% of the next year’s sales. Widget prices are $20 and are expected to remain stable. The materials and labor required to produce a widget cost $12, and these costs are also expected to remain stable. The corporate income tax rate is 30%. The discount rate is 6% per year.

(a) Forecast the incremental cash flows resulting from the purchase of a widget machine on a year-by-year basis and draw them on a timeline.

(b) Decide whether MBA Corp should go ahead with the purchase of the new machine.

Reference no: EM131523300

Questions Cloud

What is the current share price for the stock : What is the current share price for the stock?

Production-consumption of china and france without trade : What is the production and consumption of China and France without trade?

What will be your rate of return on the investment : An investment offers to pay you $10,000 a year for five years. If it costs $33,520, what will be your rate of return on the investment?

What is the current stock price : If the risk-free rate is 4.5 percent per year, compounded continuously, what is the current stock price?

Considering whether to expand widget production : MBA Corp is considering whether to expand widget production.

Yield the lender an annual effective rate : This will yield the lender an annual effective rate of 4.5% over the 1-year period. Calculate X.

What is current stock price : If the risk-free rate is 4.5 percent per year, compounded continuously, what is the current stock price?

Find the real effective annual yield : Yield to Maturity and If inflation is expected to be 6 percent, find the real effective annual yield.

Dividends are paid to common stockholders : how much must be paid to preferred stockholders in the current quarter before dividends are paid to common stockholders?

User Account

All Pages