Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Drew owns and operates an onion packing plant. To help reduce costs on labor and to increase efficiency, Drew is considering purchasing an automatic 50lb.

image text in transcribed
image text in transcribed
Drew owns and operates an onion packing plant. To help reduce costs on labor and to increase efficiency, Drew is considering purchasing an automatic 50lb. bagging machine and a machine that automatically stacks the 50lb. bags onto pallets. The cost of the two machines combined and their installation is $280,000. Drew will make a 20% down payment and finance the rest of the machinery with an amortized loan over 15 years at a 5.5% interest rate. Drew predicts that by using these two machines, his plant will be able to increase output, therefore increasing operating receipts by $40,000 per year. Also, this machinery will save him approximately $20,000 in labor costs each year by the increase in efficiency. However, other operating expenses such as electricity and insurance will increase by approximately $5,000 per year. Drew assumed a straight-line depreciation over 15 years and the life of the investment is 7 years. The terminal value is $160,000 after the 7 years, and Drew requires a pretax 10% rate of return to capital. The marginal tax rate over the next 10 years is 25%. (i) What is the initial cost for the machine? a. $64,000 b. $280,000 c. $224,000 d. $56,000 Enter response here (ii) What are the after-tax net returns? a. $41,250 b. $55,000 c. $26,250 d. $33,750 Enter response here a. $21,333.33 b. $5,333.33 c. $18,666.67 d. $4,666.67 Enter response here (iv) What is the after-tax terminal value? a. $160,000 b. $170,666.67 c. $170,166.67 d. $157,333.33 Enter response here (v) What is the appropriate discount rate to calculate the NPV given the above information? a.10\% b. 25% c. 5.5% d. 7.5% Enter response here (vi) What is the net present value? a.\$41,250 b. ($28,999.10) c. $(10,422.37) d. $58,035.72 Enter response here (vii) What is the least additional operating receipts that can be earned from the new machine and still be a good investment? a. $34,630 b. $25,365 c. $27,506 d. $35,695 Enter response here

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Options Futures And Other Derivatives

Authors: John C. Hull

7th Edition

0136015867, 9780136015864

More Books

Students also viewed these Finance questions

Question

=+ (a) Show that A,(i) is trifling.

Answered: 1 week ago