do not give solution in image Garrett Boone, Riverbed Enterprises' vice president of operations, needs to replace an automatic lathe on the production line. Themodel he is considering has a sales price of $297,934 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 $35,000 per year. He also believes the lathe will reduce energycosts by $3,500 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 O decimal places, e.g. 25%.)Internal rate of return%(b) If Riverbed Enterprises uses a 8% hurdle rate, should Garrett purchase the lathe?(c) Without doing any calculations, what do you know about the lathe's net present value?Net present value will be

Internal rate of return is rate at which the present value of cash flow is equal to initial…

Answered: Garrett Boone, Riverbed Enterprises'…

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 1R

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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?
Newmarge 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?
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
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?
Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of increasing competition, Mallette is considering investing in an automated manufacturing system. Since competition is most keen for dishwashers, the production process for this line has been selected for initial evaluation. The automated system for the dishwasher line would replace an existing system (purchased one year ago for 6 million). Although the existing system will be fully depreciated in nine years, it is expected to last another 10 years. The automated system would also have a useful life of 10 years. The existing system is capable of producing 100,000 dishwashers per year. Sales and production data using the existing system are provided by the Accounting Department: All cash expenses with the exception of depreciation, which is 6 per unit. The existing equipment is being depreciated using straight-line with no salvage value considered. The automated system will cost 34 million to purchase, plus an estimated 20 million in software and implementation. (Assume that all investment outlays occur at the beginning of the first year.) If the automated equipment is purchased, the old equipment can be sold for 3 million. The automated system will require fewer parts for production and will produce with less waste. Because of this, the direct material cost per unit will be reduced by 25 percent. Automation will also require fewer support activities, and as a consequence, volume-related overhead will be reduced by 4 per unit and direct fixed overhead (other than depreciation) by 17 per unit. Direct labor is reduced by 60 percent. Assume, for simplicity, that the new investment will be depreciated on a pure straight-line basis for tax purposes with no salvage value. Ignore the half-life convention. The firms cost of capital is 12 percent, but management chooses to use 20 percent as the required rate of return for evaluation of investments. The combined federal and state tax rate is 40 percent. Required: 1. Compute the net present value for the old system and the automated system. Which system would the company choose? 2. Repeat the net present value analysis of Requirement 1, using 12 percent as the discount rate. 3. Upon seeing the projected sales for the old system, the marketing manager commented: Sales of 100,000 units per year cannot be maintained in the current competitive environment for more than one year unless we buy the automated system. The automated system will allow us to compete on the basis of quality and lead time. If we keep the old system, our sales will drop by 10,000 units per year. Repeat the net present value analysis, using this new information and a 12 percent discount rate. 4. An industrial engineer for Mallette noticed that salvage value for the automated equipment had not been included in the analysis. He estimated that the equipment could be sold for 4 million at the end of 10 years. He also estimated that the equipment of the old system would have no salvage value at the end of 10 years. Repeat the net present value analysis using this information, the information in Requirement 3, and a 12 percent discount rate. 5. Given the outcomes of the previous four requirements, comment on the importance of providing accurate inputs for assessing investments in automated manufacturing systems.
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 %
Garrett Boone, Grouper 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 $255,530 and will last for 7 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 $38,900 per year. He also believes the lathe will reduce energy costs by $26,750 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,305.Click here to view the factor table.(a) Calculate the lathe’s internal rate of return. Internal rate of return $ % (b) If Grouper Enterprises uses a 13% hurdle rate, should Garrett purchase the lathe? YesNo Click if you would like to Show Work for this question: Open Show Work
Trillian Ltd. is considering replacing a piece of old machinery. The machine has a book value of $80,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $300,000 that will have a 3-year useful life with no salvage value. The new machine will lower annual variable production costs from $520,000 to $410,000 for each of the next three years. What will the net savings be over the next three years if Trillian buys the new machinery?
Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $18,600 per year and will have variable costs of $1,700 per year. Fixed costs are $950. The system will cost $50,400 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 21 percent. Please provide a pro forma financial statement to Cash Flows from Operations for the life of the pressure cooker. PLEASE ANSWER THIS QUESTION IN EXCEL FORMULA, NOT ALGEBRAICALLY!
Bailey, Inc., is considering buying a new gang punch that would allow circuit boards to be produced more efficiently. The punch has a first cost of $100,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Annual labor costs would increase $2,000 using the gang punch, but annual raw material costs would decrease $12,000. MARR is 5%/year. assuming that floor support and vibration dampening must be added for the gang punch. These one-time first costs are estimated to be $35,000. a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on present worth? c. Should Bailey buy the gang punch?
Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $135,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Labor costs would increase $4,500 per year using the gang punch, but raw material costs would decrease $15,500 per year. MARR is 5%/year. What is the internal rate of return of this investment? % Carry all interim calculations to 5 decimal places and then round your final answer to 1 decimal place. The tolerance is ±0.2.
Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $90,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Labor costs would increase $1,500 per year using the gang punch, but raw material costs would decrease $11,500 per year. MARR is 5%/year. What is the internal rate of return of this investment?

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