What is maximum amount of annual variable operating expenses

Assignment Help Financial Accounting
Reference no: EM13878251

Solving for Unknown Costs The Mendoza Company discussed in the chapter is now considering replacing a piece of equipment that the company uses to monitor the integrity of metal pipes used for deep-sea drilling purposes. The company's pretax WACC is estimated as 12 percent. The follow- ing data are pertinent to the question you've been asked to analyze:


Existing Asset

Replacement

Annual (pretax) variable operating expenses

$200,000

(?)

Current purchase price

N/A

$500,000

Current salvage value

$ 40,000

N/A

Expected useful life (years)

6

6

Expected salvage value, end of year 6

$ 10,000

$100,000

Required:

1. What is the maximum amount of annual variable operating expenses, pretax, that would make this an attractive investment from a present-value standpoint?

2. Assume now that the company expects, over the coming six years, to be subject to a combined income- tax rate of 40 percent, including any gain/loss realized on the sale of the existing equipment. Assume that the current book value of the existing asset is $50,000 and that the after-tax WACC for Mendoza is 10 percent. Finally, assume that the company will use SL depreciation, with no salvage value, for income-tax purposes. In this situation, what is the maximum amount of variable operating costs that can be incurred in order to make the proposed purchase attractive in a present-value sense?

3. What strategic considerations might affect the decision whether to invest in this new equipment?

Reference no: EM13878251

Questions Cloud

Draw the free-body diagram : Draw the free-body diagram of the 50-kg paper roll which has a center of mass at G and rests on the smooth blade of the paper hauler. Explain the significance of each force acting on the diagram. (SeeFigure)
What is the minimum volume of car sales per year : What is the minimum volume of car sales, per year, in the six-year life of the plant that is needed to make this proposed investment acceptable using NPV as decision criterion?
Invest rate would his investment have to earn to achieve : Michael Harper has $3,000 to invest for three years. He wants to receive $5,000 at the end of the three years. What invest rate would his investment have to earn to achieve his goal?
How a cartel in market for a network good collude on price : "In an economy in which resources can move among industries with relative ease, a cartel attempting to maximize short-term profits will sow the seeds of its own destruction." Explain.
What is maximum amount of annual variable operating expenses : What is the maximum amount of annual variable operating expenses, pretax, that would make this an attractive investment from a present-value standpoint?
Coefficient of static friction between the crate : Determine the smallest force the man must exert on the rope in order to move the crate of mass M. Also, what is the angle ? at this moment? The coefficient of static friction between the crate and the floor is µs.
What was your favorite document you drafted and why : What was your favorite document you drafted and why? What did you learn from drafting that document? What would you do differently in the future when drafting such a document
Advantage of the current online dating craze : You decide to take advantage of the current online dating craze and start your own web site. You know that you have 250 people who will sign up immediately and, through a careful marketing research and analysis, determine that membership can grow by ..
About the future value of an investment : Which of the following statements is true about the future value of an investment? The shorter the time period that funds are invested, the greater the future value. The lower the discount rate that funds are invested at, the greater the future value..

Reviews

Write a Review

Financial Accounting Questions & Answers

  Financial statement analysis and preparation

Financial Statement Analysis and Preparation

  Shareholder of a company

Describe the ways that a person can become a shareholder of a company. Why Wal-Mart would split its stock?

  Financial and accounting principles

An understanding of financial and accounting principles can be a valuable tool for managers. While not all managers will find themselves calculating financial ratios or preparing annual financial data.

  Prepare a statement of cash flow using the direct method

Prepare a Statement of Cash Flow using the Direct Method and Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.

  Financial accounting assignment

This assignment has one case study and two question apart from case study. Questions related to document Liquidation question and Company financial statements question - Torquay Limited

  Prepare general journal entries for goela

Prepare general journal entries for Goela Ltd

  Principles of financial accounting

Prepare the journal entry to record the acquisition of the assets.

  Prepare general journal entries to record the transactions

Prepare general journal entries to record the transactions, assuming use of the periodic inventory system

  Global reporting initiative

Compare the view espoused by the economist Milton Friedman about the social responsibilities of business with the views express by Stigler.

  Explain the iasb conceptual frameworks

Explain the IASB Conceptual Framework's perspective of users and their decisions.

  Determine the company''s financial statements

T he focus of the report is to determine the extent to which you are comfortable relying on the financial statements as presented by management .

  Computation of free cash flow

Computation of Free Cash Flow

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd