FNCE 2P91 Study Guide - Quiz Guide: Middlesex Centre, Air Compressor, Net Present Value

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14 Sep 2020

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1. a university student painter is considering the purchase of a new air compressorand paint gun to replace an old paint sprayer. Suppose the cca rates are 20%an 25% for the old equipment and new equipment, respectively. The two newitems cost ,500 and have a useful life of four years, at which time they can besold for ,100. The old paint sprayer can be sold now for and be scrapedfor in four years. The student is very confident that operating revenue willincrease annually by ,600. 2. a university student painter is considering the purchase of a new air compressor and paint gun to replace an old paint sprayer. (both items belong to class 9 and have a 25% These two new items cost ,200 and have a useful life of four years, at which time they can be sold for ,800. The old paint sprayer can be sold now for and could be scrapped for in four years.

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A firm is considering an investment in a new machine with a price of $18.18 million to replace its existing machine. The current machine has a book value of $6.18 million and a market value of $4.68 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.88 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $268,000 in net working capital. The required return on the investment is 11 percent, and the tax rate is 39 percent. Requirement 1: a. What is the NPV of the decision to purchase a new machine? (Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) NPV $ b. What is the IRR of the decision to purchase a new machine? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) IRR % Requirement 2: a. What is the NPV of the decision to purchase the old machine? (Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16). Enter your answer in dollars, not millions of dollars (e.g. 1,234,567). A negative amount should be indicated by a minus sign.) NPV $ b. What is the IRR of the decision to purchase the old machine? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16). A negative amount should be indicated by a minus sign.) IRR %

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At the beginning of the year 6 Hilltop Corporation is considering the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation through year 10. If Hilltop decides to replace the old machine, Baker Company has offered to purchase it for $40,000 on the replacement date. The disposal value of the old machine would be zero at the end of year 10. Hilltop uses the straight-line method of depreciation for all classes of machinery.

If the replacement occurs, a new machine would be acquired from Busby Industries at the beginning of year 6. The purchase price of $500,000 for the new machine would be paid in cash at the time of replacement. Due to the increased efficiency of the new machine, estimated annual cash savings of $125,000 would be generated through year 10, the end of its expected useful life. The new machine is expected to have a zero disposal price at the end of year 10.

All operating cash receipts, operating cash expenditures, and applicable tax payments and credits are assumed to occur at the end of the year. Hilltop employs the calendar year for reporting purposes.

The accrual accounting rate of return on the net investment, to the nearest percent, is
a. 0%. b. 5.0.%. c. 5.43%. d. 28%.

show work.

ultramarinewalrus833

Replacement analysis

The Darlington Equipment Company purchased a machine 5 years ago at a cost of $90,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,000 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life.

A new machine can be purchased for $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $60,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life; so the applicable depreciation rates are 33%, 45%, 15%, and 7%.

The old machine can be sold today for $50,000. The firm's tax rate is 40%. The appropriate WACC is 9%.

If the new machine is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign.
$

What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar.

Year 1	Year 2	Year 3	Year 4	Year 5
$	$	$	$	$

What is the NPV of this project? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
$

Should Darlington replace the old machine?

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FNCE 2P91 Study Guide - Quiz Guide: Middlesex Centre, Air Compressor, Net Present Value

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