The Austin Manufacturing Company is considering buying an overhead pulley system. The new system has a purchase price of $150,000, an estimated useful life and MACRS class life of five years, and an estimated salvage value of $10,000. The system is expected to enable the company to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective products made. A total annual savings of $95,000 will be realized if the new pulley system is installed. The company is in the 30 % marginal tax bracket. The initial investment will be financed with 40% equity (company finances) and 60% debt (loan). The interest rate is 12% with the loan to be repaid in equal annual installments over 3 years. a) Compute the after-tax cash flows over the project life. b) Compute NPW at MARR = 12%. c) Is this project acceptable, yes or no, explain?

The Austin Manufacturing Company is considering buying an overhead pulley system. The new system has a purchase price of $150,000, an estimated useful life and MACRS class life of five years, and an estimated salvage value of $10,000. The system is expected to enable the company to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective products made. A total annual savings of $95,000 will be realized if the new pulley system is installed. The company is in the 30 % marginal tax bracket. The initial investment will be financed with 40% equity (company finances) and 60% debt (loan). The interest rate is 12% with the loan to be repaid in equal annual installments over 3 years. a) Compute the after-tax cash flows over the project life. b) Compute NPW at MARR = 12%. c) Is this project acceptable, yes or no, explain?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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