Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 11, Problem 10P
St. Johns River Shipyard’s welding machine is 15 years old, fully
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St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still
functional as originally designed and can be used for quite a while longer. A new welder will cost $180,000 and have an estimated life of 8 years
with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before
depreciation from $27,000 to $81,000 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable
depreciation rates are 20.00%, 32.00 %, 19.20 %, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 25%, and the project cost
of capital is 10%. What is the NPV if the firm replaces the old welder with the new one? Do not round intermediate calculations. Round your
answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign.
$
St. Johns River Shipyard’s welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $182,500 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient,however, and this enhanced efficiency will increase earnings before depreciation from $27,000 to $74,000 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 25%, and the project cost of capital is 12%. What is the NPV if the firm replaces the old welder with the new one?
t. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $182,500 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $29,000 to $78,500 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 25%, and the project cost of capital is 25%, and the project cost of capital is 15%. What is the NPV if the firm replaces the old welder with the new one? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign.
Chapter 11 Solutions
Financial Management: Theory & Practice
Ch. 11 - Prob. 2QCh. 11 - Why is it true, in general, that a failure to...Ch. 11 - Prob. 4QCh. 11 - Explain how net operating working capital is...Ch. 11 - How do simulation analysis and scenario analysis...Ch. 11 - Why are interest charges not deducted when a...Ch. 11 - Most firms generate cash inflows every day, not...Ch. 11 - What are some differences in the analysis for a...Ch. 11 - Distinguish among beta (or market) risk,...Ch. 11 - Prob. 11Q
Ch. 11 - Talbot Industries is considering launching a new...Ch. 11 - The financial staff of Cairn Communications has...Ch. 11 - Allen Air Lines must liquidate some equipment that...Ch. 11 - Although the Chen Company’s milling machine is...Ch. 11 - Wendys boss wants to use straight-line...Ch. 11 - The Campbell Company is considering adding a...Ch. 11 - The president of your company, MorChuck...Ch. 11 - The Rodriguez Company is considering an...Ch. 11 - St. Johns River Shipyards welding machine is 15...Ch. 11 - Shao Industries is considering a proposed project...Ch. 11 - The Everly Equipment Company’s flange-lipping...Ch. 11 - The Bartram-Pulley Company (BPC) must decide...Ch. 11 - The Yoran Yacht Company (YYC), a prominent...Ch. 11 - Shrieves Casting Company is considering adding a...Ch. 11 - Disregard the assumptions in Part a. What is the...Ch. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Estimate the required net operating working...Ch. 11 - Prob. 6MCCh. 11 - Calculate the project cash flows for each year....Ch. 11 - Prob. 8MCCh. 11 - What is a real option? What are some types of real...
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- Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?arrow_forwardNewmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?arrow_forwardSt. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $181, 500 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $28,000 to $73, 500 per year. The new machine will be depreciated over its 5- year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52 %, 11.52 %, and 5.76%. The applicable corporate tax rate is 25%, and the project cost of capital is 10%. What is the NPV if the firm replaces the old welder with the new one? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign. F1 Inflation Adjustments The Rodriguez Company is…arrow_forward
- Saint John River Shipyard's welding machine is 15 years old, is fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $182, 500 and have an estimate life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase annual cash flows before taxes (not including any CCA tax shield effects) from $27,000 to $74,000 per year. The new welder falls into Class 43 with a CCA rate of 30%. The applicable corporate tax rate is 25%, and the project cost of capital is 12%. What is the NPV if the firm replaces the old welder with the new one?arrow_forwardABC company is considering replacing their old manual loading machine with an automatic loading machine. The manual machine cost $300,000 three years ago, and is being depreciated over 10 years straight line depreciation, with no salvage value. If ABC replaces the manual machine, the new automatic machine will cost $400,000 and have a useful life of 10 years. This will also be depreciated on a straight line basis to zero. As a result of this new machine, there will be pretax savings of $130,000 in labour costs and $25,000 in other cash expenses annually. If the automatic machine is purchased, the old machine will immediately be sold at a price of $280,000. The company has already spent $15,000 researching the costs associated with this decision. The company's tax rate is 40% and no inflation is expected. The company's cost of capital is 7%. Calculate the net present value of this decision using a financial calulatorarrow_forwardThe Sumitomo Chemical Corporation is considering replacing a 5-year-old machine that originally cost $50,000 and can be sold for $60,000. This machine is totally depreciated. The replacement machine would cost $125,000 and have a 5-year expected life over which it would be depreciated down using the straight-line method and have no salvage value at the end of five years. The new machine would produce savings before depreciation and taxes of $45,000 per year. Assuming a 34 percent marginal tax rate and a required return of 10%, calculate The internal rate of return and the net present value. Please show work in Excel.arrow_forward
- The Container Corporation of America is considering replacing an automatic painting machine purchased 9 years ago for $700,000. It has a market value today of $40,000. The unit costs $350,000 annually to operate and maintain. A new unit can be purchased for $800,000 and will have annual O&M costs of $120,000. If the old unit is retained, it will have no salvage value at the end of its remaining life of 10 years. The new unit, if purchased, will have a salvage value of $100,000 in 10 years. Using an EUAC measure and a MARR of 20% should the automatic painting machine be replaced if the old automatic painting machine is taken as a trade-in for its market value of $40,000? Solve, a. Use the cash flow approach (insider’s viewpoint approach). b. Use the opportunity cost approach (outsider’s view point approach).arrow_forwardKitchen Supplies, Inc. must replace a machine in its manufacturing plant that will have no salvage value. It has a choice between two models. The first machine will last 5 years and will cost $300,000. It will generate an annual cost savings of $50,000. Annual maintenance costs will be $20,000. The machine will be fully depreciated using the straight-line depreciation method and will have no salvage value. The second machine will last 7 years and will cost $600,000. It will generate an annual cost savings of $70,000. This machine will also be fully depreciated using the straight-line depreciation method, but is expected to have a salvage value of $60,000 at the end of the seventh year. The annual maintenance cost is $15,000. Revenues in each case are expected to be the same. The annual tax rate is 35% and the cost of capital is 10%. Which machine should the company purchase?arrow_forwardA packaging factory is considering the replacement of some equipment. The new plan is to install equipment to produce a new can that uses less energy and less metal than the old one. Current equipment was installed 5 years ago for $100 million and can be sold for $35 million. Due to obsolescence the depreciation of this equipment results in an annual depreciation of $4 million for the next years. If you keep this equipment for one more year your operating and maintenance costs will be $65 million increasing by $3 million/year each year thereafter. The new equipment will cost $130 million, with an economic life of 8 years and a salvage value of $10 million. Its operating and maintenance costs will be $49 million. For a TMAR = 15% p.a. what new equipment should be installed? Make a recommendation about it. (Answer: The solution would be to use the current equipment for another two years and then exchange it for new equipment.arrow_forward
- Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method. Complete the following table to compute the net present value (NPV) of the investment. (Hint: Remember that, in Year 10, Alliances also receives the salvage value of the machine.) Year Cash Flow PV Interest Factor at 14%…arrow_forwardAlliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method.a. What is the net cash flow in year 0 (i.e., initial outlay)?b. What are the net cash flows after taxes in each of the next 10 years?c. What is the NPV of the investment?d. Should Alliance replace its existing drill press?arrow_forwardThe Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newerand more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years.The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell itnow to another firm in the industry for $265,000. The old machine is being depreciated toward a zerosalvage value, or by $120,000 per year, using the straight-line method. The new machine has a purchaseprice of $1,175,000, an estimated useful life 6 year and fall under 5 years MACRS, and an estimated salvagevalue of $145,000. The applicable depreciation rates are 20 percent, 32 percent, 19 percent, 12 percent, 11percent, and 6 percent. It is expected to economize on electric power usage, labor, and repair costs, as well asto reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the newmachine is installed. The company’s…arrow_forward
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