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Questions-Making Capital Investment Decision

Questions-Making Capital Investment Decision. Q1). Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $480,000 is estimated to result in $195,000 in annual pretax cost savings.

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Questions-Making Capital Investment Decision

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  1. Questions-Making Capital Investment Decision

  2. Q1) • Massey Machine Shop is considering a four-year project to improve its production efficiency. • Buying a new machine press for $480,000 is estimated to result in $195,000 in annual pretax cost savings. • The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $81,000. • (year 1: 20%, year 2: 32%, year 3: 19.20%, year 4: 11.52%, year 5: 11.52%, year 6: 5.76%) • The press also requires an initial investment in spare parts inventory of $21,000, along with an additional $2,600 in inventory for each succeeding year of the project. • The shop’s tax rate is 30 percent and its discount rate is 8 percent. • NPV=?

  3. Q2) • Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. • System A costs $260,000, has a four-year life, and requires $80,000 in pretax annual operating costs. • System B costs $366,000, has a six-year life, and requires $74,000 in pretax annual operating costs. • Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. • Whichever system is chosen, it will not be replaced when it wears out. • The tax rate is 30 percent and the discount rate is 9 percent. • NPV for both convertor belt systems? • EAC=?

  4. Q3) • Vandalay Industries is considering the purchase of a new machine for the production of latex. • Machine A costs $3,054,000 and will last for six years. • Variable costs are 35 percent of sales, and fixed costs are $200,000 per year. • Machine B costs $5,238,000 and will last for nine years. • Variable costs for this machine are 30 percent and fixed costs are $135,000 per year. • The sales for each machine will be $10.2 million per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis. • The company plans to replace the machine when it wears out on a perpetual basis • NPVs and EACs?

  5. Q4) • Tech Enterprises is considering a new project that will require $325,000 for fixed assets, $160,000 for inventory, and $35,000 for accounts receivable. Short-term debt is expected to increase by $100,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 25 percent of their original cost and the net working capital will return to its original level. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35 percent and the required rate of return is 15 percent. What is the net present value of this project

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