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emeraldcicada88Lv1

28 Sep 2019

Four years ago a company purchased a new copy machine. Due to deterioration, soon a new copy machine will be needed. The annual maintenance cost for the existing machine is $1,600 and increasing 100 each year. An identical copy machine can be purchased now to replace the presently owned assets. The presently owned copy machine losses each year $10,000 in resale value, compare the assets with at 10% per year and compute when the presently owed should be replace.

Same model as presently owned

Present value (when new) $75,000

Present value of new copy machine $85,000

Annual cost (old copy machine) 1,100

Annual cost (new copy machine) 1,600 and increasing

Salvage value (both machine) 15,000

Life in years (both machine) 6

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Deanna HettingerLv2

30 Sep 2019

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Tremont Designs is considering replacing one of its machines. The current equipment was purchased 5 years ago, and its installed cost was $225,000. At that time it was estimated to have a useful life of 10 years. The machine is being depreciated using the simplified straight-line method and has market value today is $10,000. The machine runs 3 shifts each day, two full-time machine operators are required to operate each shift. Each is paid a $40,000 annual salary. The existing machine creates about $20,000 worth of defects per year, and costs $5,000 per year to maintain.

The proposed machine costs $390,000, requires the company to spend $30,000 for shipping and installation. If purchased, it will be depreciated to a zero book balance using SSLD over its 5-year expected useful life. Though the firm does not expect revenues to increase with the new machine, the newer model is more efficient and less labor intensive. As a result only one machine operator is required on each shift, the cost of defects would drop to $8,000 per year, and maintenance would now reach $12,000 annually. Green expects to the proposed new machine to have a $64,000 market value at the end this time. The firmâs total marginal tax rateâboth state and federalâis 35% and the risk adjusted discount rate of this project is 15%. With relation to the cash flows associated with this replacement, what is/are the:

A) Initial outlay associated with this project?

B) Annual after-tax cash flows associated with this project (OCFs), for years 1 through 4?

C) Total Terminal year cash flow in year 5?

goldguinea-pig994

ou should show your cash flows using the steps and approach used by me in class.
1. (17 pts) Tremont Designs is considering replacing one of its machines. The current equipment waspurchased 5 years ago, and its installed cost was $225,000. At that time it was estimated to have a usefullife of 10 years. The machine is being depreciated using the simplified straight-line method and has marketvalue today is $10,000. The machine runs 3 shifts each day, two full-time machine operators are required tooperate each shift. Each is paid a $40,000 annual salary. The existing machine creates about $20,000 worth

of defects per year, and costs $5,000 per year to maintain.
The proposed machine costs $390,000, requires the company to spend $30,000 for shipping and installation.If purchased, it will be depreciated to a zero book balance using SSLD over its 5-year expected useful life. Though the firm does not expect revenues to increase with the new machine, the newer model is moreefficient and less labor intensive. As a result only one machine operator is required on each shift, the cost ofdefects would drop to $8,000 per year, and maintenance would now reach $12,000 annually. Green expectsto the proposed new machine to have a $64,000 market value at the end this time. The firmâs total marginaltax rateâboth state and federalâis 35% and the risk adjusted discount rate of this project is 15%. Withrelation to the cash flows associated with this replacement, what is/are the:
a. Initial outlay associated with this project?b. Annual after-tax cash flows associated with this project (OCFs), for years 1 through 4?c. Total Terminal year cash flow in year 5?

2. (20 pts) Shark Attack, Inc. must analyze the feasibility of a new piece of equipment that has an estimated
useful life of 8 years, and the firm would like your help to make this decision. The firm plans to depreciatethe equipment to a zero book value using SSLD. The purchase price of the equipment is $500,000 and it willcost another 10 percent of this price to ship and properly install. In addition, to safely operate theequipment, workers will require an extensive training session that will cost nearly $8,000. The firm hasestimated that to begin using the machine, it will need to invest $70,000 in inventories. At the same timeaccounts payable will increase by $35,000. At the end of its life, Baby Blue hopes to sell the machine to a

smaller competitor for $112,000.

The machine is expected revenues attributable to the new machine to be $375,000 each year before tax, butsales of one of the firm's existing products will decline by $50,000 per year before tax. In addition, cashoperating expenses related to the new production process are expected to reach 38 percent of salesannually. Shark requires an 18 percent return for this type of project, and its marginal tax rate is 40%. Whatare the after-tax cash flows associated with this proposed project?
a. The initial outlay?b. OCFs in years 1-7?c. Terminal year cash flows in year 8âseparated into operating and non-operating after-tax flows?

champagnejellyfish429

Precision Putters Inc.

Precision Putters Inc. is a manufacturer of high quality putters for the golfing industry. The company was started eight years ago by Jake Johnson. Jake was an avid golfer with a background in the metalworking industry. As a hobby, he started making putters for himself and some of his friends. As he and some other users of his putters had some success in local amateur tournaments, the reputation and demand for his putters increased. He soon found that he was getting enough requests for his putters that he quit his job at a machine shop and formed Precision Putters Inc. He started his operation with a couple of pieces of machinery in his garage. However, within two years, business was good enough that he moved his operations to a 30,000 square foot manufacturing facility.

The company now sells its putters worldwide and several professional players have won tournaments using Precision Putters (which has obviously helped to boost demand).

The management of Precision Putters is currently evaluating the purchase of a new high-speed computerized grinding machine to replace its existing grinding machine.

Sally Smith, a recent Geneseo Business School graduate who is now working at Precision Putters as a financial analyst, must analyze this project and present her findings to the companyâs executive committee.

The new machine costs $710,000 and shipping and installation cost would total $10,000. In addition, installation of the new equipment would cause Precision Puttersâ inventories to increase by $6,500, accounts receivable to increase by $4,000, and accounts payable to increase by $3,500. The company plans on using the new machine for 5 years. The new machine would be depreciated under MACRS using a 5-year recovery period. It is expected that the new machine can be sold for $95,000 at the end of 5 years.

The existing machine can be sold currently for $112,000 before taxes. It is 4 years old, cost $420,000 new, and is being depreciated as a 7-year class asset under MACRS. It is expected that the existing machine can be sold for $10,000 at the end of 5 years.

The new machine is expected to generate $385,000 in profits before depreciation and taxes for each of the next 5 years. The existing machine is expected to generate $190,000 in profits before depreciation and taxes for each of the next 5 years. The firm is subject to a 40% tax rate on both ordinary income and capital gains.

The section of the building where the new piece of equipment would be installed has been unused for several years, and consequently had suffered some deterioration. Last year, as part of a routine facilities improvement program, the company spent $30,000 to rehabilitate that section of the building. Jake Johnson is not sure but thinks that maybe this outlay, which has already been paid and expensed for tax purposes, should be charged to this new equipment project. His contention is that if the rehabilitation had not taken place, the firm would have had to spend the $30,000 to make the site suitable for the new equipment.

Precision Putters has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. The investment banker believes that 10 year, 9% coupon, $1,000 par value bonds could currently be sold, with a flotation cost of 3% of par value. The firm could sell, at par, $100 preferred stock which pays a 12% annual dividend, and flotation costs of $5.00 per share would be incurred. The companyâs common stock has experienced a constant dividend growth rate of 8%, and the company recently paid a dividend of $2.10. The stock is currently selling for $30.00 per share. Any new common stock issued would incur an 8% flotation cost. Management assumes that all new projects will require the issuance of new common stock, and the firmâs weighted average cost of capital to should be used to evaluate the project.

Sally was asked to analyze the project, and then present her findings to the companyâs executive committee. Since some members of the executive committee have a very limited knowledge of capital budgeting techniques, Sally wants to help to educate them. Therefore, she has decided to ask and then answer a series of questions as set forth below.

Questions

1.Should the money that was spent to rehabilitate the plant last year be included in the analysis? Explain.

2.What is Precision Puttersâ net initial investment for this project (Year 0 net cash flow)?

3.Define incremental cash flow, and then set forth the projectâs operating cash flow statement for each year of operations. What is the expected non-operating terminal cash flow when the project is terminated at Year 5?

4.What is the firmâs cost of capital? (Show the calculation of each of the three component costs)

5.What is the projectâs NPV? (Remember to analyze the projectâs relevant incremental cash flows including the terminal cash flow in year 5) Explain the economic rationale behind the NPV.

6.What is the projectâs IRR? Explain the rational for using the IRR to evaluate projects. Which of the two methods (NPV and IRR) is theoretically superior and why?

7.What is the projectâs payback period? What is the rationale behind the use of payback period as an evaluation tool? What are some drawbacks with this method?

8.What overall recommendation would you make regarding this project?

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