Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question A manufacturing company is considering replacing an old machine with a new one. The risk-free rate of return is given as 4% p.a. The

Question

A manufacturing company is considering replacing an old machine with a new one. The risk-free rate of return is given as 4% p.a. The yearly return for the share market is given as 12%. Suppose a listed company has a beta value of 0.75. The shareholders of the company cannot benefit from imputation credits. The old machine was purchased 5 years ago for $100,000 and is expected to have a useful life of 10 years and zero salvage value. If the company sold the old machine today, it would receive $40,000. The new machine will cost $75,000 and is expected to have a useful life of 5 years with zero salvage value. The old machine has maintenance costs of $10,000 per year whereas the new machine has maintenance costs of $1,000 per year. The new machine will also reduce the cost of defects from $5,000 per year to $1,000 per year. The company uses straight-line depreciation, and assumes a company tax rate of 30%.

  • a) Whatistheinvestorsrequiredrateofreturnforthecompanysshares?
  • b) If the company is either a taxation category 1 or a taxation category 2 company, to which taxation category does the company belong. Would capital budgeting for the company be performed on a before-tax or an after-tax basis?
  • c) If the old machine were sold today identify the annual depreciation expense and the tax savings for the old machine.

  • d) Calculate the initial outlay for the project.

  • e) Calculate the annual depreciation expense for the new machine and determine the net cash flows for years 1-5 of the project.

  • f) Discuss what the payback period identifies and therefore why it is readily used.

  • g) Calculate the payback period. What are the weaknesses of the payback period method for evaluating projects?

  • h) Calculate the net present value (NPV), profitability index (PI) and internal rate of return (IRR) of the project.

  • i) Is the project an acceptable investment? Explain your answer.

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

Step: 3

blur-text-image

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

College Mathematics For Business Economics, Life Sciences, And Social Sciences

Authors: Raymond Barnett, Michael Ziegler, Karl Byleen, Christopher Stocker

14th Edition

0134674146, 978-0134674148

More Books

Students also viewed these Finance questions

Question

Get married, do not wait for me

Answered: 1 week ago

Question

Do not pay him, wait until I come

Answered: 1 week ago

Question

Do not get married, wait until I come, etc.

Answered: 1 week ago