XYZ Company has sales of $4,800,000, COGS is 40% of sales, operating expenses ar
ID: 2719942 • Letter: X
Question
XYZ Company has sales of $4,800,000, COGS is 40% of sales, operating expenses are $2,100,000, interest expense $20,000 and depreciation 30,000. Tax rate 40%. XYZ is now evaluating the purchase of a new machine for $210,000 installed with no NWC change. They plan to sell the machine at the end of 3 years for $40,000. MACRS 3 year depreciation. With the more efficient machine, labor savings per year are expected to be $70,000, $94,000 and $76,000 respectively. 40% tax. The cost of capital for this project is 8.2%
2. XYZ has current assets of $680,000 fixed assets of $5,400,000, and$240,000 in AP and accruals. They are presently at 90% of capactiy. What can sales reach before they need to add fixed assets?
5,333,333
5,280,000
4,320,000
6,800,000
3. True or False: They have a need for external funds (AFN)?
Please show work.
Explanation / Answer
1. Calculation of NPV
Statement showing savings in cost
NPV = 69997x0.924 + 81293x0.854 + 50207x0.789 + 40000x0.789 - 210000
= (4725)
2. Level of sales that can be reached = 4800000/90% = 5333333
Thus answer will be 5333333
year Savings in labour cost (A) loss of tax savings (B) Depreciation Tax savings on depreciation (C) Total Cost savings (A-B+C) 1 70000 28000 69993 27997 69997 2 94000 37600 62233 24893 81293 3 76000 30400 11518 4607 50207
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