Manchester Corporation is considering the purchase of a new boiler for $350,000. The firm's old boiler...
Manchester Corporation is considering the purchase of a new boiler for $350,000. The firm's old boiler has a book value of $85,000, but has a current market value of $60,000. It is being depreciated on a straight-line basis at the rate of $21,250 per year (and, as result, will be fully depreciated in 4 years). Its salvage value is expected to be $20,000 at the end of 5 years. The new boiler will require modifications costing $15,000. The new boiler will be depreciated using the 5-year MACRS schedule. It is expected to have a salvage value of $80,000 at the end of 5 years, at which time it will be sold. The new boiler is expected to increase revenues by $63,000 for each of the next 5 years. In addition, operating expenses will be reduced by $32,000 for each of the next five years. Manchester's marginal tax rate is 40 percent. Its marginal cost of capital is 15 percent.
Chunkendales' Beef has a 12% cost of capital, and has generated the following information on two projects:
Year Project 1 Project 2 ---------------------------------------------------------------------------
0 ($100,000) ($250,000)
1 30,000 75,000
2 30,000 75,000
3 30,000 75,000
4 30,000 75,000
5 50,000 100,000
a. Compute the Payback for both projects.
b. Compute the Profitability Index for both projects.
c. Compute the net present value of both projects.
d. Compute the internal rate of return for both projects.
Homework Answers
As per HOMEWORKLIB POLICY, only the first question per submission can be solved. Here comes the solution for first question:
| Tax rate | 40% | |||||||
| Calculation of annual depreciation | ||||||||
| Calculation of after-tax salvage value- old equipment | ||||||||
| WDV | Cost less accumulated depreciation | $ 85,000 | ||||||
| Sale price | $ 60,000 | |||||||
| Profit/(Loss) | Sale price less WDV | $ (25,000) | ||||||
| Tax | Profit/(Loss)*tax rate | $ (10,000) | ||||||
| Sale price after-tax | Sale price less tax | $ 70,000 | ||||||
| Cost of new boiler | $ 350,000 | |||||||
| Modification | $ 15,000 | |||||||
| Total cost | $ 365,000 | |||||||
| Less Salvage value | $ (70,000) | |||||||
| Net investment at T0 | $ 295,000 | |||||||
| Depreciation | Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | Total | ||
| Cost | $ 365,000 | $ 365,000 | $ 365,000 | $ 365,000 | $ 365,000 | |||
| Dep Rate (1/6= 16.67%) | 20.00% | 32.00% | 19.20% | 11.52% | 11.52% | |||
| Depreciation | Cost * Dep rate | $ 73,000 | $ 116,800 | $ 70,080 | $ 42,048 | $ 42,048 | $ 343,976 | |
| Depreciation old equipment | $ 21,250 | $ 21,250 | $ 21,250 | $ 21,250 | ||||
| Incremental depreciation | $ 51,750 | $ 95,550 | $ 48,830 | $ 20,798 | $ 42,048 | |||
| Calculation of after-tax salvage value | New machine | Old machie | ||||||
| Cost of machine | $ 365,000 | |||||||
| Depreciation | $ 343,976 | |||||||
| WDV | Cost less accumulated depreciation | $ 21,024 | $ - | |||||
| Sale price | $ 80,000 | $ 20,000 | ||||||
| Profit/(Loss) | Sale price less WDV | $ 58,976 | $ 20,000 | |||||
| Tax | Profit/(Loss)*tax rate | $ 23,590 | $ 8,000 | |||||
| Sale price after-tax | Sale price less tax | $ 56,410 | $ 12,000 | |||||
| Incremental salvage value | 56410-12000 | $ 44,410 | ||||||
| Calculation of annual operating cash flow | ||||||||
| Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | ||||
| Sale | $ 63,000 | $ 63,000 | $ 63,000 | $ 63,000 | $ 63,000 | |||
| Add: saving in labor cost | $ 32,000 | $ 32,000 | $ 32,000 | $ 32,000 | $ 32,000 | |||
| Contribution | $ 95,000 | $ 95,000 | $ 95,000 | $ 95,000 | $ 95,000 | |||
| Less: Depreciation | $ 51,750 | $ 95,550 | $ 48,830 | $ 20,798 | $ 42,048 | |||
| Profit before tax (PBT) | $ 43,250 | $ (550) | $ 46,170 | $ 74,202 | $ 52,952 | |||
| Tax@40% | PBT*Tax rate | $ 17,300 | $ (220) | $ 18,468 | $ 29,681 | $ 21,181 | ||
| Profit After Tax (PAT) | PBT - Tax | $ 25,950 | $ (330) | $ 27,702 | $ 44,521 | $ 31,771 | ||
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