Question 2: An automobile manufacturer is facing trouble producing valves for their most popular model. Their current equipment, purchased three years ago has not been as cost effective as they hoped. The have an opportunity to retrofit the equipment for $750,000. The current cost of producing one valve and the potential cost after the new equipment is purchased is shown here: Direct Labor Direct Materials Variable Overhead Fixed Overhead Total Unit Cost Current Potential $ 3.60 $ 1.90 $ 3.70 $ 3.90 $ 1.60 $ 1.50 $ 4.305 4.30 $ 13.20 5 11.60 The company's current tax rate is 35%. These machines typically have a 10 year life with 10% salvage value They generally make 100,000 valves every year and like to hold 5,000 in inventory. (A) Calculate the operating cash flows that would result from retrofitting the equipment. Yearly Revenue Tax Rate Yearly Expenses Production Yearly Depreciation Expected Annual EBIT Estimated Tax Operating Cash Flow (6) Calculate the net present value of the equipment using a 5% discount rate. 1 2 3 5 7 8 9 10 Cash Flows / Time Investment Working Capital Operating Cash Flow Salvage Total Cash Flow Discounted Cash Flow Net Present Value Discount Rate (C) What discount rate makes the NPV of this investment less than 0 (answer to the nearest tenth of a percent)? How could you use this information to inform the investment decision? Question 2: An automobile manufacturer is facing trouble producing valves for their most popular model. Their current equipment, purchased three years ago Thas not been as cost effective as they hoped. The have an opportunity to retrofit the equipment for $750,000. The current cost of producing one valve and the potential cost after the new equipment is purchased is shown here: Direct Labor Direct Materials Variable Overhead Fixed Overhead Total Unit Cost Current Potential $ 3.60 $ 1.90 $ 3.70 $ 3.90 $ 1.60 $ 1.50 $ 4.30 $ 4.30 $ 13.20 $ 11.60 The company's current tax rate is 35%. These machines typically have a 10 year life with 10% salvage value. They generally make 100,000 valves every year and like to hold 5,000 in inventory. (A) Calculate the operating cash flows that would result from retrofitting the equipment. Yearly Revenue Tax Rate Yearly Expenses Production Yearly Depreciation Expected Annual EBIT Estimated Tax Operating Cash Flow (8) Calculate the net present value of the equipment using a 5% discount rate. 0 3 5 7 10 Cash Flows / Time Investment Working Capital Operating Cash Flow Salvage Total Cash Flow Discounted Cash Flow Net Present Value Discount Rate 19 What discount rate makes the NPV of this investment less than answer to the nearest tenth of a percent)? How could you use this information to inform the investment decision
