PRIN.OF CORPORATE FINANCE
PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 10, Problem 4PS
Summary Introduction

To conduct: A sensitivity analysis of replacement decision with a rate of discount.

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Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. In this case, the company will need to perform a replacement analysis to determine which alternative is the best financial decision for the company. Consider the case of LoRusso Company: The managers of LoRusso Company are considering replacing an existing piece of equipment, and have collected the following information: • The new piece of equipment will have a cost of $600,000, and it will be depreciated on a straight-line basis over a period of five years (years 1–5). • The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and three more years of depreciation left ($50,000 per year). • The new equipment will have a salvage value of $0 at the end of the project's life (year 5). The old machine has a current salvage value (at year 0) of…
A pipeline engineer working in Kuwait for the oil giant BP wants to perform a present worth analysis on alternative pipeline routings—the first predominately by land and the second primarily undersea. The undersea route is more expensive initially due to extra corrosion protection and installation costs, but cheaper security and maintenance reduces annual costs. Use Present Worth Analysis with a MARR = 10% to determine which route should be selected.
The Gizmo Manufacturing Company is considering making and selling a new product. The following data have been provided to management: Some managers are reluctant to launch a new product because of the uncertainty of future sales. To provide management with information that might make it easier to draw the correct conclusion, a break-even analysis will be performed for annual sales required to economically justify introducing the new product.What is the break-even value of units sold annually?
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