Wayne\'s Weinie Works has found an opportunity to purchase a more efficient wein
ID: 2760684 • Letter: W
Question
Wayne's Weinie Works has found an opportunity to purchase a more efficient weinie machine. It is expected that the new machine will generate revenues of $32,000 and expenses of $12,000 per year during its 5 year life. It would replace a machine that would generate revenues of $25,000 and expenses of $16,000 for each of the next 5 years. If purchased, the new machine will cost $28,000 plus $4,000 in shipping and set-up costs. Due to the increase in efficiency, a one time reduction of the inventory of neat scraps will be $3,000 and current liabilities will also decrease by $1,000. The machine will be depreciated on a 5 year schedule (.20,.32,.19,.12,.11,.06). It will be worth $6,000 in 5 years. The old machine is 2 years old and cost $25,000 new. It is also on a 5 year depreciation schedule and could be sold today for $15,000. If it is not sold today it's estimated value will be $4,000 in 5 years. The company has a 40% marginal tax rate and the WACC is 9%.Explanation / Answer
Year new machine cost dep rate depreciation old machine cost dep rate old machine dep cost of new machine 28000 1 26000 0.2 5200 21000 0.2 4200 shipping 4000 2 26000 0.32 8320 21000 0.32 6720 cost of machine 32000 3 26000 0.19 4940 21000 0.19 3990 sale proceeds of old machine 15000 4 26000 0.12 3120 21000 0.12 2520 tax benefits from the loss of sale of old machne 800 5 26000 0.11 2860 21000 0.11 2310 reduction in working capital 4000 net cash outflow 12200 Gains from new machne cost of new machine cash flow fron new machne cash flow from old machine differentia; cash flow differential depreciation Tax 40% after tax cash flow differential depreciation after tax cash flow present value@9% present value of cash flow Year -12200 1 32000 12000 20000 9000 11000 1000 10000 4000 6000 1000 7000 0.917431 6422.018 2 32000 12000 20000 9000 11000 1600 9400 3760 5640 1600 7240 0.84168 6093.763 3 32000 12000 20000 9000 11000 950 10050 4020 6030 950 6980 0.772183 5389.841 4 32000 12000 20000 9000 11000 600 10400 4160 6240 600 6840 0.708425 4845.628 5 32000 12000 20000 9000 11000 550 10450 4180 6270 550 6820 0.649931 4432.532 6000 0.6499 3899.4 sum of present value of cash flow 31083.18 cash outflow 12200 NPV of th Project 18883.18 PI discounted cash inflow/cash outflow 2.547802 IRR 53%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.