Question

my question is Q19, cost cutting proposals, thank you so much !

valent awwali wafer willing has pretax opet a five-year life, machines, use alvage value of 10 percent, compute X manufacturing needs value. If the required return is 11 percent, what is this project's equivale cost, or EAC? 17. Calculating EAC [LO4] You are evaluating two different silicon wafer machines. The Techron I costs $270,000, has a three-year life, and has pre ating costs of $69,000 per year. The Techron Il costs $475,000, has a five- and has pretax operating costs of $36,000 per year. For both milling machi straight-line depreciation to zero over the project's life and assume a salvage $45,000. If your tax rate is 35 percent and your discount rate is 10 percent. the EAC for both machines. Which do you prefer? Why? 18. Calculating a Bid Price (LO3) Romo Enterprises needs someone to sup with 140,000 cartons of machine screws per year to support its manufacturing over the next five years, and you've decided to bid on the contract. It will cost $940,000 to install the equipment necessary to start production; you'll deprecia preciate this cost straight-line to zero over the project's life. You estimate that, in five years this equipment can be salvaged for $85,000. Your fixed production costs will be $435,000 per year, and your variable production costs should be $15.10 per carton You also need an initial investment in net working capital of $90,000. If your tax rate is 35 percent and you require a return of 12 percent on your investment, what bid price should you submit? 19. Cost-Cutting Proposals [LO2] Warmack Machine Shop is considering a four- year project to improve its production efficiency. Buying a new machine press for $410,000 is estimated to result in $155,000 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 $55,000. The press also requires an initial investment in spare parts inven- tory of $20,000, along with an additional $3,100 in inventory for each succeeding year of the project. If the shop's tax rate is 35 percent and its discount rate is 9 per- cent, should the company buy and install the machine press? 20. Comparing Mutually Exclusive Projects (LO1] Lang Industrial Systems Com- pany (LISC) is trying to decide between two different conveyor belt systems. System A costs $290,000, has a four-year life, and requires $80,000 in pretax annual oper- ating costs. System B costs $375,000, 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 project is chosen. it will not be replaced when it wears out. If the tax rate is 34 percent and the discount rate is 8 percent, which project should the firm choose? Comparing Mutually Exclusive Projects (L04] Suppose in the previous problem that LISC always needs a conveyor belt system; when one wears out, it must be replaced. Which project should the firm choose now? Calculating a Bid Price (LO3] Consider a project to supply 100 million postage stamps per year to the U.S. Postal Service for the next five vears You parcel of land available that cost $850 000 fim it would

Answer 1

Answer to Question 19:

Initial Investment = $410,000
Useful Life = 4 years

Depreciation Year 1 = 20.00% * $410,000
Depreciation Year 1 = $82,000

Depreciation Year 2 = 32.00% * $410,000
Depreciation Year 2 = $131,200

Depreciation Year 3 = 19.20% * $410,000
Depreciation Year 3 = $78,720

Depreciation Year 4 = 11.52% * $410,000
Depreciation Year 4 = $47,232

Book Value at the end of Year 4 = $410,000 - $82,000 - $131,200 - $78,720 - $47,232
Book Value at the end of Year 4 = $70,848

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $55,000 - ($55,000 - $70,848) * 0.35
After-tax Salvage Value = $60,546.80

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$410,000 - $20,000
Net Cash Flows = -$430,000

Year 1:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $155,000 * (1 - 0.35) + 0.35 * $82,000
Operating Cash Flow = $129,450

Net Cash Flows = Operating Cash Flow - Investment in NWC
Net Cash Flows = $129,450 - $3,100
Net Cash Flows = $126,350

Year 2:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $155,000 * (1 - 0.35) + 0.35 * $131,200
Operating Cash Flow = $146,670

Net Cash Flows = Operating Cash Flow - Investment in NWC
Net Cash Flows = $146,670 - $3,100
Net Cash Flows = $143,570

Year 3:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $155,000 * (1 - 0.35) + 0.35 * $78,720
Operating Cash Flow = $128,302

Net Cash Flows = Operating Cash Flow - Investment in NWC
Net Cash Flows = $128,302 - $3,100
Net Cash Flows = $125,202

Year 4:

Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Operating Cash Flow = $155,000 * (1 - 0.35) + 0.35 * $47,232
Operating Cash Flow = $117,281.20

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $117,281.20 + $29,300 + $62,712
Net Cash Flows = $207,128

Required Return = 9%

NPV = -$430,000 + $126,350/1.09 + $143,570/1.09^2 + $125,202/1.09^3 + $207,128/1.09^4
NPV = $50,171.04

NPV of this project is positive, therefore the company should install this machine press.