Novak Fashions needs to replace a beltloop attacher that currently costs the company $58,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $3,128. Managers have identified a potential replacement machine, Euromat's Model HD-435. The HD-435 is priced at $93,000 and would cost Novak Fashions $38,000 in annual cash operating costs. The machine has a useful lif of 8 years, and it is not expected to have any salvage value at the end of that time. Click here to view the factor table. (a) Calculate the net present value of purchasing the HD-435, assuming Novak Fashions uses a 12% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to O decimal place, eg. 58,971.) Net present value $ (b) Calculate the internal rate of return on the HD-435. (Round answer to 0 decimal places, eg. 25%.) Internal rate of return (c) Calculate the payback period of the HD-435. (Round answer to 4 decimal places, e.g. 15.2515.) Payback period years

Novak Fashions needs to replace a beltloop attacher that currently costs the company $58,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $3,128. Managers have identified a potential replacement machine, Euromat's Model HD-435. The HD-435 is priced at $93,000 and would cost Novak Fashions $38,000 in annual cash operating costs. The machine has a useful lif of 8 years, and it is not expected to have any salvage value at the end of that time. Click here to view the factor table. (a) Calculate the net present value of purchasing the HD-435, assuming Novak Fashions uses a 12% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to O decimal place, eg. 58,971.) Net present value $ (b) Calculate the internal rate of return on the HD-435. (Round answer to 0 decimal places, eg. 25%.) Internal rate of return (c) Calculate the payback period of the HD-435. (Round answer to 4 decimal places, e.g. 15.2515.) Payback period years

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 20P: The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting,...

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The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 8%, and the projects’ expected net costs are listed in the following table: What is the IRR of each alternative? What is the present value of the costs of each alternative? Which method should be chosen?
Hudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?
Jonfran Company manufactures three different models of paper shredders including the waste container, which serves as the base. While the shredder heads are different for all three models, the waste container is the same. The number of waste containers that Jonfran will need during the following years is estimated as follows: The equipment used to manufacture the waste container must be replaced because it is broken and cannot be repaired. The new equipment would have a purchase price of 945,000 with terms of 2/10, n/30; the companys policy is to take all purchase discounts. The freight on the equipment would be 11,000, and installation costs would total 22,900. The equipment would be purchased in December 20x4 and placed into service on January 1, 20x5. It would have a five-year economic life and would be treated as three-year property under MACRS. This equipment is expected to have a salvage value of 12,000 at the end of its economic life in 20x9. The new equipment would be more efficient than the old equipment, resulting in a 25 percent reduction in both direct materials and variable overhead. The savings in direct materials would result in an additional one-time decrease in working capital requirements of 2,500, resulting from a reduction in direct material inventories. This working capital reduction would be recognized at the time of equipment acquisition. The old equipment is fully depreciated and is not included in the fixed overhead. The old equipment from the plant can be sold for a salvage amount of 1,500. Rather than replace the equipment, one of Jonfrans production managers has suggested that the waste containers be purchased. One supplier has quoted a price of 27 per container. This price is 8 less than Jonfrans current manufacturing cost, which is as follows: Jonfran uses a plantwide fixed overhead rate in its operations. If the waste containers are purchased outside, the salary and benefits of one supervisor, included in fixed overhead at 45,000, would be eliminated. There would be no other changes in the other cash and noncash items included in fixed overhead except depreciation on the new equipment. Jonfran is subject to a 40 percent tax rate. Management assumes that all cash flows occur at the end of the year and uses a 12 percent after-tax discount rate. Required: 1. Prepare a schedule of cash flows for the make alternative. Calculate the NPV of the make alternative. 2. Prepare a schedule of cash flows for the buy alternative. Calculate the NPV of the buy alternative. 3. Which should Jonfran domake or buy the containers? What qualitative factors should be considered? (CMA adapted)
Novak Fashions needs to replace a beltloop attacher that currently costs the company $58,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $3,128. Managers have identified a potential replacement machine, Euromat's Model HD-435. The HD-435 is priced at $93,000 and would cost Novak Fashions $38,000 in annual cash operating costs. The machine has a useful life of 8 years, and it is not expected to have any salvage value at the end of that time. Click here to view the factor table.
Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $170,000. The new machine will cost $360,000 and an additional cash investment in working capital of $170,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $130,000 in additional cash inflows during the first year of acquisition and $290,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of…
Axdew Limited is considering whether to manufacture an improved, more expensive version of their current line of best-selling lava lamps. Axdew currently spends $15,000 per year on maintenance and $80,000 on full-time salaries for staff. Maintenance costs are expected to remain the same but an additional labourer will need to be hired at an annual cost of $30,000. Manufacture of the newer version will require re-tooling of its existing machinery at a cost of $40,000. Axdew paid consultants a fee of $30,000 for a feasibility study to determine the viability of the new product. Which of the costs discussed above need to be considered by management in deciding whether to proceed with the new product? Justify your answer.
A small company that manufactures vibration isolation platforms is trying to decide whether it should replace the current assembly system (D), which is rather labor intensive, now or 1 year from now with a system that is more automated (C). Some components of the current system can be sold immediately for $9000, but they will be worthless hereafter. The operating cost of the existing system is $192,000 per year. System C will cost $320,000 with a $50,000 salvage value after 4 years. Its operating cost will be $68,000 per year. If you are told to do a replacement analysis using an interest rate of 10% per year, which system do you recommend?
Poisson Calculators has found that it is indifferent between purchasing a high-capacity vacuum component assembly machine or a lower capacity machine as long as sales are above 1,900 units per month. The price of each calculator is $70. The high-capacity machine has cash expenses of $100,000 per month and depreciation and amortisation expenses of $30,000 per month, while the alternative has cash expenses of $30,000 per month and depreciation and amortisation expenses of $5,000 per month. Under the low-capacity alternative, variable costs per unit are $60. If the company bases its decisions on the Accounting Operating Profit Break-even, then what is the variable cost per unit under the high-capacity alternative? a. $10 b. $47 c. $60 d. $70
Garrett Boone, Ayayai Enterprises’ vice president of operations, needs to replace an automatic lathe on the production line. The model he is considering has a sales price of $395,900 and will last for 12 years. It will have no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $42,500 per year. He also believes the lathe will reduce energy costs by $23,500 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,338.Click here to view the factor table.(a) Calculate the lathe’s internal rate of return. Internal rate of return $ % (b) If Ayayai Enterprises uses a 10% hurdle rate, should Garrett purchase the lathe? YesNo
Garrett Boone, Bridgeport Enterprises’ vice president of operations, needs to replace an automatic lathe on the production line. The model he is considering has a sales price of $233,282 and will last for 15 years. It will have no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $24,000 per year. He also believes the lathe will reduce energy costs by $6,000 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,100.Click here to view the factor table.(a) Calculate the lathe’s internal rate of return. (Round answer to 0 decimal places, e.g. 25%.) Internal rate of return enter the internal rate of return in percentages rounded to 0 decimal places %
Your company has been approached to bid on a contract to sell 21,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3,500,000 and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $115,000 to be returned at the end of the project, and the equipment can be sold for $235,000 at the end of production. Fixed costs are $770,000 per year and variable costs are $38 per unit. In addition to the contract, you feel your company can sell 4,100, 11,700, 13,700, and 7,000 additional units to companies in other countries over the next four years, respectively, at a price of $135. This price is fixed. The tax rate is 23 percent, and the required return is 13 percent. Additionally, the president of the company will undertake the project only…
Your company has been approached to bid on a contract to sell 19,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4,000,000 and will be depreciated on a straight- line basis to a zero salvage value. Production will require an investment in net working capital of $140,000 to be returned at the end of the project, and the equipment can be sold for $260,000 at the end of production. Fixed costs are $795,000 per year and variable costs are $43 per unit. In addition to the contract, you feel your company can sell 4,600, 12,200, 14,200, and 7,500 additional units to companies in other countries over the next four years, respectively, at a price of $140. This price is fixed. The tax rate is 23 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only…