Smithers Industries is considering the purchase of a new machine for the product
ID: 2634242 • Letter: S
Question
Smithers Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,126,000 and will last for six years. Variable costs are 30 percent of sales, and fixed costs are $265,000 per year. Machine B costs $5,346,000 and will last for nine years. Variable costs for this machine are 25 percent of sales and fixed costs are $200,000 per year. The sales for each machine will be $11.5 million per year. The required return is 9 percent, and the tax rate is 34 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.
Calculate the NPV for each machine. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.
Calculate the EAC for each machine. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places. (e.g., 32.16))
Smithers Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,126,000 and will last for six years. Variable costs are 30 percent of sales, and fixed costs are $265,000 per year. Machine B costs $5,346,000 and will last for nine years. Variable costs for this machine are 25 percent of sales and fixed costs are $200,000 per year. The sales for each machine will be $11.5 million per year. The required return is 9 percent, and the tax rate is 34 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.
Explanation / Answer
Replacement method Discounting rate Depreciation working Machine A Machine B Year 9% Machine A Dsic. Cash flow Machine B Dsic. Cash flow cost 3126000 5346000 0 1.00 -3126000.00 -3126000.00 -5346000.00 -5346000.00 Life 6 9 1 0.92 5315240.00 4876366.97 5762460.00 5286660.55 per year 521000 594000 2 0.84 5315240.00 4473731.17 5762460.00 4850147.29 3 0.77 5315240.00 4104340.52 5762460.00 4449676.42 sales 11500000 11500000 4 0.71 5315240.00 3765450.02 5762460.00 4082271.94 Less : variable cost -3450000 -2875000 5 0.65 5315240.00 3454541.30 5762460.00 3745203.62 contribution 8050000 8625000 6 0.60 2189240.00 1305372.28 5762460.00 3435966.62 Less : fixed cost -265000 -200000 7 0.55 5315240.00 2907618.30 5762460.00 3152262.95 depreciation -521000 -594000 8 0.50 5315240.00 2667539.72 5762460.00 2891984.36 Profit 7264000 7831000 9 0.46 5315240.00 2447284.15 416460.00 191749.75 Less tax @ 34% -2469760 -2662540 10 0.42 5315240.00 2245214.82 5762460.00 2434125.38 Post tax profit 4794240 5168460 11 0.39 5315240.00 2059830.11 5762460.00 2233142.55 add : non cash expenses 12 0.36 2189240.00 778350.84 5762460.00 2048754.63 depreciation 521000 594000 13 0.33 5315240.00 1733717.79 5762460.00 1879591.41 operating cash flow 5315240 5762460 14 0.30 5315240.00 1590566.78 5762460.00 1724395.78 15 0.27 5315240.00 1459235.58 5762460.00 1582014.48 common life = 18 years 16 0.25 5315240.00 1338748.24 5762460.00 1451389.43 I.a machine A will have 3 repetitions at yr 0,6 and 12 and Machine B will have 2 repitition at yr 0 and 9 17 0.23 5315240.00 1228209.39 5762460.00 1331549.94 18 0.21 5315240.00 1126797.61 5762460.00 1221605.45 Answers NPV NPV 40436915.59 42646492.56 Machine A 40436915.59 Machine B 42646492.56 Discounting rate EAC Year 9% Machine A Dsic. Cash flow Machine B Dsic. Cash flow Machine A 4618392.76 0 1.00 -3126000.00 -3126000.00 -5346000.00 -5346000.00 Machine B 4870753.60 1 0.92 5315240.00 4876366.97 5762460.00 5286660.55 2 0.84 5315240.00 4473731.17 5762460.00 4850147.29 3 0.77 5315240.00 4104340.52 5762460.00 4449676.42 4 0.71 5315240.00 3765450.02 5762460.00 4082271.94 5 0.65 5315240.00 3454541.30 5762460.00 3745203.62 6 0.60 5315240.00 3169303.95 5762460.00 3435966.62 7 0.55 0.00 5762460.00 3152262.95 8 0.50 0.00 5762460.00 2891984.36 9 0.46 0.00 5762460.00 2653196.66 20717733.93 29201370.42 sum of annuity for 6 yrs 4.49 sum of annuity for 9 yrs 6.00 Equivalent annual cash flow 4618392.76 4870753.60
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