Asset depreciation range, Financial Management

Assignment Help:

Work out and submit the comprehensive problem below.

  1. Halstrom Corporation purchased a piece of equipment three years ago for $230,000. It has an asset depreciation range (ADR) midpoint of eight years. This equipment can be sold now for $90,000.

A new piece of equipment can be purchased for $320,000 that would replace the existing equipment. It also has an ADR of eight years.

The new equipment, if purchased, will have a useful life of six years, with no salvage value at the end of that time. If the old equipment is kept, it will be operated for six more years in addition to the three years it has already been operated. It also will have no salvage value at the end of that time.

The old and new equipment would provide the following operating gains or losses (earnings before depreciation, interest, and taxes) over the next six years, beginning with the coming year.

Table 2

Year

New Equipment

Old Equipment

1 (1st year of new equip., 4th year of old equip.)

$80,000

$25,000

2

76,000

16,000

3

70,000

9,000

4

60,000

8,000

5

50,000

6,000

6

45,000

(7,000)

The firm has a 36 percent tax rate and a 9 percent cost of capital. Do the calculations to determine if the new equipment should be purchased to replace the old equipment. Should the new equipment be purchased or should the old equipment be kept in operation?

Be careful here. This problem involves an investment that is supposed to increase profits, whereas the problem in Part 1 involved investing in a machine that would result in a cost savings. While the cash benefit resulting from the purchase of new equipment can come either in the form of a cost savings or an increase in profit, in this case be careful to work with the increase in cash flows resulting from the purchase of the new machine, not merely the profit from the new machine. The fact that the new machine will earn some profit is not sufficient reason to invest in it. It must increase profits enough to justify its purchase. This is easily seen if we consider a case where the new machine will in fact earn a profit, but the profit will actually be less than the existing machine is presently earning. Clearly, one would not purchase such a machine to replace the existing one. It is the increase in cash flows that counts.


Related Discussions:- Asset depreciation range

Analysis of capitalization, You must analyze how the company is financed th...

You must analyze how the company is financed through equity and debt financing. You will discuss the level of leverage and how it compares to similar companies in the Industry.

Calculate the maximum price of machine, Silvana Zhang of Sajjad Jafri & Geo...

Silvana Zhang of Sajjad Jafri & Geopeng Li Limited is considering purchasing a new widget making machine. She would like to know the maximum price she should pay for the new machin

What is the value of the security to an investor, What is the Value of the ...

What is the Value of the security to an investor Value of the security to an investor is directly proportional to the return that he is expected to get from that security. Hig

What are the material items are carried out, What are the Material items ar...

What are the Material items are carried out Material items would have an impact on: Audit tests carried out. For illustration compliance based testing (relying on contro

Illustration of valuation using multiple discount rates, Illustration  ...

Illustration  Let us assume that Vishal Mehta & Co., (from Illustration 1) is using the following discounting rates in place of one rate:

Expected value application in finance - project evaluation, Project Evaluat...

Project Evaluation The expected value calculations are crucial to project investment decisions. The following example explains the use of probabilities in project evaluation.

Explanation and definition of the mos, a) i = 800 units, ii = 250 units, ii...

a) i = 800 units, ii = 250 units, iii = 60% b) Explanation and Definition of the MOS. Play-it has the better MOS in absolute terms, although Tread-it has the better MOS when mea

Assembling the divestiture team, Assembling the Divestiture Team: Dives...

Assembling the Divestiture Team: Divestment of a business requires a team of functional experts under the direction of an experienced project manager. The first and foremost ac

Explain the checklists -documenting the accounting system, Checklists or qu...

Checklists or questionnaires Audit firm will have a standard list of control questions. Audit staff can quickly ascertain which if any, are in operation by the client. There

Social assistance program for the elderly, Social Assistance Program for th...

Social Assistance Program for the Elderly For the elderly destitutes, the Central and many State Governments have designed several social assistance programs. Under the nationa

Write Your Message!

Captcha
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