Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The Auto Express Diagnostics company is considering expanding their operations by purchasing a new hydraulic jack (to lift vehicles) with electronic diagnostics. It will require

The Auto Express Diagnostics company is considering expanding their operations by purchasing a new hydraulic jack (to lift vehicles) with electronic diagnostics. It will require an immediate investment of $375,000 to get the compressor up and running. The air compressor has an expected life of 7 years and will be depreciated using a MACRS 10-year class schedule. The expected salvage value is $140,000. In addition to the cost of the equipment, this expansion will require an investment of $130,000 in net working capital at the outset. Based on exploratory conversations with other auto repair companies, the company projects the following incremental sales:

Year Vehicle Diagnostics

3,500

4,000

4,500

5,000

5,100

5,500

5,500

Each diagnostic will be sold at $120 per diagnostic.

Labor costs associated with this project are expected to be $24,000 in year 1. These costs are expected to increase by 4% to 8% each year, with the most likely increase being 6%. Due to regional power issues, electricity prices can display wide swings. Thus, the company expects electricity costs to be $25,000 in year 1, with annual increases of 7% to 9%. No single value in that range is more likely to occur than any other. Fixed costs are expected to remain unchanged at $74,000 each year.

The weighted average cost of capital used to evaluate a project of this risk is 10 percent (with a standard deviation of 1.5 percent). The relevant tax rate is 40 percent. Based on this information, assist the Auto Express Diagnostics Company in making the right decision as to whether or not purchase the hydraulic diagnostic jack

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

More Books

Students also viewed these Finance questions

Question

Is SHRD compatible with individual career aspirations

Answered: 1 week ago