Explain what is ssp''s net investment required in the fmc

Assignment Help Financial Management

Reference no: EM13215106

Specialty Steel Products (SSP) is considering replacing some of its machinery with a new flexible machining center (FMC) that will permit it to respond more quickly to changes in the marketplace. The price of the new equipment is $1.2 million. Base your analysis on the following data contained in SSP's capital authorization request:

A) Because the new system will boost output quality significantly, it is estimated that SSP's annual sale will rise somewhat, from its current level of $1.7 million to $2 million annually for the next five years. The before-tax and before-depreciation profit margin on SSP's sales, old and new, is estimated at 40%.

B) Working capital requirements are estimated to remain at 25% of sales.

C) The FMC will also cut overhead costs by $85,000 per year for the next five years.

D) The old machinery was purchased for $1 million three yeasr ago, and is being depreciated on a straight-line basis over its five year life. Its economic life as of today, however, is estimated to be five years. It can be sold for $300,000 today.

D) The FMC will be depreciated on a straight-line basis over its five-year life.

E) SSP faces a 40% corporate tax rate.

F) Given the relatively low risk of the revenue enhancement and cost savings, SSP estimates that the incremental cash flows generated by the FMC will have a cost of capital of only 12%, as compared to 14% for a typical company project. The risk-free interest rate is currently 8%.

G) SSP will receive and investment tax credit equal to 10% of the purchase price of the FMC.

H) The working capital will be recaptured at the end of fice years.

a. What is SSP's net investment required in the FMC? Assume that both pieces of equipment are being depreciated to a zero salvage value?

b. What are the operating cash flows for each of the next five years?

c. On the basis of the information supplied, should SSP replace its current equipment with the new system?

d. What questions might you raise about some of the assumptions implicit in SSP's capital authorization request?

Reference no: EM13215106

Questions Cloud

Describe two different kinds of communication software : Is Web search a database query? Explain your answer.

How should ethics be incorporated into making accounting : write a four-to-six sentence paragraph on the following question. Good business and accounting practices require the exercise of good judgment. How should ethics be incorporated into making accounting judgments

Create a new project plan using microsoft project : Create a new project plan using Microsoft Project for a two-day training session in which people are brought in from different parts of the country.

Analysis of the companys short term : Discuss and interpret the financials in relation to the initiative. Make recommendations on potential discretionary financing needs and write a 350 - 700 word analysis of the company's short term and long term financing needs and determine strate..

Explain what is ssp''s net investment required in the fmc : What is SSP's net investment required in the FMC? Assume that both pieces of equipment are being depreciated to a zero salvage value?

Propose solution and recommend implementation of decision : The final submission of your project at the end of the term will be a 2000-3000 word document that you will submit to outline the problem, propose your solution, and recommend implementation of your solution.

Prepare journal entries on first trusts books on december : Vargo Corp. owes $308,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2014. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2016, reduce the principal to $248,100.

Hindering the employee''s performance : Identify an issue which is hindering the employee's performance. You may choose any issue which is relevant in your workplace. The performance issue could involve using the Internet on company time.

Explain company to estimate the cost of capital for gci : You used Dell as a representative company to estimate the cost of capital for GCI. What are some of the potential problems with this approach in this situation? What improvements might you suggest?

User Account

All Pages