Question

pls answer 1 and 2

Chapter 13 In-Class Case J& J, Inc. is considering the purchase and installation of new manufacturing equipment to replace its old equipment. The following information is available to use in evaluating this investment. Cost of the new equipment including sales tax would be $3,000,000. There would be an additional cost of $600,000 to set up and test the new equipment. J& J would plan to use the equipment for 8 years using straight-line depreciation. a. b. c. d At the end of 8 years, J & J estimates the equipment could be sold for $30,000. Working capital investment of $750,000 is required. This amount would be released at the end of 8 years. The new equipment will make the manufacturing process more efficient, and management estimates the equipment will generate an annual cost savings of $800,000. A maintenance cost of $200,000 will be required at the end of the 4th year e. f. g. h If the new manufacturing equipment is purchased, the current equipment, which costs $900,000 could be sold immediately for $450,00o. Accumulated depreciation on the equipment is $500,000. J & J's cost of capital is 10%. J & J's corporate tax rate is 21%. 1. Based on the information provided above, should J &J invest in the new equipment? 2. If J & J planned to use the equipment for 10 years instead of 8, the investment would generate an additional 2 years of cost savings. However, at the end of 10 years the equipment would have no resale value due to pending obsolescence. The working capital would still be released at the end of the investment. An additional maintenance cost of $200,000 would be required at the end of the 8th year. Other costs and rates would remain the same. How would your answer change if J & J planned to use the equipment for 10 years? 下501 006 Iouestmet Sales So 3, 90o/000

Answer 1

Question1 Working Note 1 Horking Note 2 Horking Note 3 Amount $ Terminal Cash Flows I. Initial Investment Depreciation Value Equipment Value $3,600,000Working Capital - Salvage Value Salvage Value $30,000 $750,000 $780,000 Equipment $3,600,000) orkingしapi Required Sale of New Asset $750,000) 450,000 $3,900,000) $30,000 $3,570,000 Life Time Dep. PerYear $446.250 Cash Flow Statement Amount $ Particulars Coat Saving $800,000 $800,000 $800,000 $800,000 $800,000 $800,000 $800,000 $800,000 Maintenance Cost $200,000) ($446,250) $153.750 $32,288 $121,463 $446.250 $567,713 ($446,250) $353.750 $74,288 $279,463 $446.250 $725,713 ($446,250) $353.750 $74,288 $279,463 $446.250 $725,713 ($446,250) $353.750 $74,288 $279,463 $446.250 $725,713 ($446,250) $353.750 $74,288 $279,463 $446.250 $725,713 ($446,250) $353.750 $74,288 $279,463 $446.250 $725,713 ($446,250 $353.750 $74,288 $279,463 $446.250 $725,713 ($446,250) $353.750 $74,288 $279,463 $446.250 $725,713 Lepreciation Less: Tax @ 21% Profit After Ta Add: Deprecation Cash Flows Initial Cash Out Floys $3,900,000) $780,000

Flows Total Cash Flows PV Factor @ 10% Dis Cash Flow s Net Present Value $780,000 $1,505,713 0.467 $703,168 $567.713 0.683 $387.748 $3,900,000)$725,713 0.909 $3,900,000$659,673 $725,713 0.826 $599.439 $725,713 0.751 $545,010 $725,713 0.621 $450,667 $725,713 0.564 $409.302 $725,713 0.513 $372,291 $227.296 Hence NPV is positive. the nev Equipment is Recommedable Notes 1.lgnored the Ta on Profit on Sale of the Old Equipment Question 2 Working Note 1 Working Note 2 Working Note 3 Amount $ Terminal Cash Flows Initial Inuestment Depreciation Value Salvage Value $0

$750 ($3,600,000 Va $3,600,000 Working Capital $750,000 $450,000 ($3,900,000) Salvage Value Sale of New Asset $3,600,000 Life Time $360,000 Cash Flow Statement Year ar $800,000 $800,000 $800,000 $800,000 $800,000 $800,000 $800,000 $800,000 $800,000$800,000 at Less Mai Depreciation $200,000 $360,000 $240,000 $50,400 $189,600 $360,000 $549,600 $200,000 $360,000 $360,000) $240,000 $440,000$440,000 $360,000 $440,000 $92,400 $360,000) $440.000 $92,400 $347,600 $360,000 $707,600 ($360,.000 $440,000 $32,400 $360,000) $440,000 $92,400 $347,600 $360,000 $707,600 $360,000 $440.000 $92,400 $347,600 $360,000 $707,600 $360,000 $440.000 $92,400 $347,600 $360,000 $707,600 $360,000 $50.400 $92,400 $189,600$347,600$347,600 $360,000 $360,000$360,000 $549,600 $707,600 Profit After Tax Add: Deprecation Cash Flows Initial Cash Out Flows $360,000 $707,600 $360,000 707,600 $707,600 $3,900,000 $750,000 Total Cash Flows Py Factor0 Dis Cash Flows Net Present Value $707,600 $707,600 $707,600 #549,600 $707,600 $707,600 $707,600 #549,600 $707,600 $1,457,600 $3,900,000 $375,377 $362.999 00,0 $553,83 643.208 $584,478 $3S9.086 $256,663 $300,022 #561,176 Hence NPV is Positive, the new Equipment is Recommedable