Question Details

(solution) Question A manufacturing company is considering replacing an old


Question 

A manufacturing company is considering replacing an old machine with a new one. The risk-free rate of return is given as 4% p.a. The yearly return for the share market is given as 12%. Suppose a listed company has a beta value of 0.75. The shareholders of the company cannot benefit from imputation credits. The old machine was purchased 5 years ago for $100,000 and is expected to have a useful life of 10 years and zero salvage value. If the company sold the old machine today, it would receive $40,000. The new machine will cost $75,000 and is expected to have a useful life of 5 years with zero salvage value. The old machine has maintenance costs of $10,000 per year whereas the new machine has maintenance costs of $1,000 per year. The new machine will also reduce the cost of defects from $5,000 per year to $1,000 per year. The company uses straight-line depreciation, and assumes a company tax rate of 30%.

  • a) What is the investors? required rate of return for the company?s shares?   
  • b) If the company is either a taxation category 1 or a taxation category 2 company, to which taxation category does the company belong. Would capital budgeting for the company be performed on a before-tax or an after-tax basis?
  • c) If the old machine were sold today identify the annual depreciation expense and the tax savings for the old machine.

                                                                                              

  • d) Calculate the initial outlay for the project.

                                                                                              

  • e) Calculate the annual depreciation expense for the new machine and determine the net cash flows for years 1-5 of the project.

                                                                                           

  • f) Discuss what the payback period identifies and therefore why it is readily used.


  • g) Calculate the payback period. What are the weaknesses of the payback period method for evaluating projects?


  • h) Calculate the net present value (NPV), profitability index (PI) and internal rate of return (IRR) of the project.


  • i) Is the project an acceptable investment? Explain your answer.

a 10% b

 

It would be done on the after tax basis for cash flows.

 

c

 

Annual Depreciation $ 10,000 Loss on Machine

 

Tax saving when sold $ 10000

 

3,000 d

 

Initial outlay $ 38,000 e

 

Annual Depreciation $...

 


Solution details:
STATUS
Answered
QUALITY
Approved
ANSWER RATING

This question was answered on: Jan 30, 2021

PRICE: $15

Solution~0001001467.zip (25.37 KB)

Buy this answer for only: $15

This attachment is locked

We have a ready expert answer for this paper which you can use for in-depth understanding, research editing or paraphrasing. You can buy it or order for a fresh, original and plagiarism-free solution (Deadline assured. Flexible pricing. TurnItIn Report provided)

Pay using PayPal (No PayPal account Required) or your credit card . All your purchases are securely protected by .
SiteLock

About this Question

STATUS

Answered

QUALITY

Approved

DATE ANSWERED

Jan 30, 2021

EXPERT

Tutor

ANSWER RATING

GET INSTANT HELP/h4>

We have top-notch tutors who can do your essay/homework for you at a reasonable cost and then you can simply use that essay as a template to build your own arguments.

You can also use these solutions:

  • As a reference for in-depth understanding of the subject.
  • As a source of ideas / reasoning for your own research (if properly referenced)
  • For editing and paraphrasing (check your institution's definition of plagiarism and recommended paraphrase).
This we believe is a better way of understanding a problem and makes use of the efficiency of time of the student.

NEW ASSIGNMENT HELP?

Order New Solution. Quick Turnaround

Click on the button below in order to Order for a New, Original and High-Quality Essay Solutions. New orders are original solutions and precise to your writing instruction requirements. Place a New Order using the button below.

WE GUARANTEE, THAT YOUR PAPER WILL BE WRITTEN FROM SCRATCH AND WITHIN A DEADLINE.

Order Now