FINANCE-The Everly Equipment Company purchased a machine 5 years ago at a cost of $100,000

QUESTION 1-8:

The Everly Equipment
Company purchased a machine 5 years ago at a cost of $100,000. 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 $10,000 per year. If the machine is
not replaced, it can be sold for $10,000 at the end of its useful life.
A new machine can be
purchased for $160,000, including installation costs. During its 5-year life,
it will reduce cash operating expenses by $50,000 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 $55,000. The firm’s tax rate is 35%, and the appropriate WACC is
15%.
1.
If the new machine is
purchased, what is the amount of the initial cash flow at Year 0?
$

2.
What are the
incremental net cash flows that will occur at the end of Years 1 through 5?

CF1

$

CF2

$

CF3

$

CF4

$

CF5

$

3.
What is the NPV of
this project? Round your answer to the nearest cent.
$
Should Everly replace the old machine?

-Select-
Yes
No

QUESTION 1-7:
St. Johns River
Shipyards is considering the replacement of an 8-year-old riveting machine with
a new one that will increase earning before depreciation from $25,000 to
$50,000 per year. The new machine will cost $84,500, and it will have an
estimated life of 8 years and no salvage value. The new machine will be
depreciated over its 5-year MACRS recovery period, so the applicable
depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable
corporate tax rate is 40%, and the firm’s WACC is 13%. The old machine has been
fully depreciated and has no salvage value. Should the old riveting machine be
replaced by the new one?

QUESTION 1-6:
The Taylor Toy
Corporation currently uses an injection-molding machine that was purchased 2
years ago. This machine is being depreciated on a straight-line basis, and it
has 6 years of remaining life. Its current book value is $2,400, and it can be
sold for $2,500 at this time. Thus, the annual depreciation expense is
$2,400/6=$400 per year. If the old machine is not replaced, it can be sold for
$500 at the end of its useful life.
Taylor is offered a replacement machine that has a cost of
$7,800, an estimated useful life of 6 years, and an estimated salvage value of
$780. This machine falls into the MACRS 5-years class, so the applicable
depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine
would permit an output expansion, so sales would rise by $1,000 per year; even
so, the new machine’s much greater efficiency would reduce operating expenses
by $1,500 per year. The new machine would require that inventories be increased
by $2,000, but accounts payable would simultaneously increase by $500. Taylor’s
marginal federal-plus-state tax rate is 40%, and its WACC is 12%. Should it
replace the old machine?

QUESTION 1-5:
The Campbell Company
is evaluating the proposed acquisition of a new milling machine. The machine’s
base price is $106,000, and it would cost another $92,000 to modify it for
special use. The machine falls into the MACRS 3-year class, and it would be
sold after 3 years for $68,000. The machine would require an increase in net
working capital (inventory) of $6,500. The milling machine would have no effect
on revenues, but it is expected to save the firm $41,000 per year in before-tax
operating costs, mainly labor. Campbell’s marginal tax rate is 30%.
1.
What is the net cost
of the machine for capital budgeting purposes? (That is, what is the Year 0 net
cash flow?)
$
2.
What are the net
operating cash flows in Years 1, 2, and 3? Round your answers to the nearest
dollar.

3.
What is the additional
Year 3 cash flow (that is, the after-tax salvage and the return of working
capital)? Round your answer to the nearest dollar.

4.
If the project’s cost
of capital is 15 %, should the machine be purchased?

QUESTION 1-4:
The Chen
Company is considering the purchase of a new machine to replace an obsolete
one. The machine being used for the operation has both a book value and a
market value of zero; it is in good working order, however, and will last
physically for at least another 10 years. The proposed replacement machine will
perform the operation so much more efficiently that Chen’s engineers estimate
it will produce after-tax cash flows (labor savings and depreciation) of $8,300
per year. The new machine will cost $42,000 delivered and installed, and its
economic life is estimated to be 10 years. It has zero salvage value. The
firm’s WACC is 12%, and its marginal tax rate is 35%.
Should Chen buy the new machine?

QUESTION 1-3:
Allen Air Lines is now in the terminal year of a project. The equipment
originally cost $12 million, of which 80% has been depreciated. Carter can sell
the used equipment today to another airline for $4.2 million, and its tax rate
is 40%. What is the equipment’s after-tax net salvage value?

QUESTION 1-2:
Cairn Communications is trying to estimate the first-year
operating cash flow (at t = 1) for a proposed project. The financial staff has
collected the following information:

Projected sales

$5
million

Operating costs (not
including depreciation)

3.5
million

Depreciation

1
million

Interest expense

1
million

The company faces a 35% tax rate. What is the project’s
operating cash flow for the first year (t = 1)?
QUESTION 1-1:
Talbot Industries is
considering an expansion project. The necessary equipment could be purchased
for $16 million, and the project would also require an initial $2 million
investment in net operating working capital. The company’s tax rate is 40%.
1.
What is the initial
investment outlay?
$
2.
The company spent and
expensed $50,000 on research related to the project last year. Would this
change your answer?