The Balas Manufacturing Company is considering buying an overhead pulley system. The new system has a purchase
Question:
The Balas Manufacturing Company is considering buying an overhead pulley system. The new system has a purchase price of $150,000, an estimated useful life and MACRS class life of five years, and an estimated salvage value of $10,000. The system is expected to enable the company to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective products made. A total annual savings of $95,000 will be realized if the new pulley system is installed. The company is in the 35% marginal tax bracket. The initial investment will be financed with 40% equity and 60% debt. The before‐tax debt interest rate, which combines both short‐term and long‐term financing, is 12% with the loan to be repaid in equal annual installments over the project life.
(a) Determine the after‐tax cash flows.
(b) Evaluate this investment project by using an MARR of 20%.
(c) Evaluate this investment project on the basis of the IRR criterion.
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...
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