Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The Catseye Marble Co. is thinking of replacing a manual production process with a machine. The manual process requires three relatively unskilled workers and a

The Catseye Marble Co. is thinking of replacing a manual production process with a machine. The manual process requires three relatively unskilled workers and a supervisor. Each worker makes $17,500 a year and the supervisor earns $24,500. The new machine can be run with only one skilled operator who will earn $41,000. Payroll taxes and fringe benefits are an additional third of all wages and salaries.

The machine costs $150,000 and has a tax depreciation life of five years. Catseye elects straight-line depreciation for tax purposes. A service contract covers all maintenance for $5,000 a year. The machine is expected to last six years, at which time it will have no salvage value. The machine's output will be virtually indistinguishable from that of the manual process in both quality and quantity. There are no other operating differences between the manual and the machine processes. Catseye's marginal tax rate is 32%, and its cost of capital is 10%.

  1. Calculate the incremental cash flows associated with the project to acquire the machine. Use a minus sign to indicate negative cash flows or decreases in cash, if required.
    0th year CF $
    1st-5th years CF (per year) $
    6th year CF $
  2. Calculatetheproject'spayback.Roundtheanswertoonedecimalplace.Donotroundyourintermediatecalculations.PaybackPeriod=year(s) Calculatetheproject'sNPV.Roundtheanswertothenearestwholedollar.Donotroundyourintermediatecalculations.NPV=$
  3. Suppose there is no alternative but to lay off the displaced employees, and the cost of severance is about three months' wages. How much would the project's NPV decrease by? Round the answer to the nearest dollar. Do not round your intermediate calculations.$

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

Fundamentals Of Corporate Finance

Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan

13th Edition

1265553602, 978-1265553609

More Books

Students also viewed these Finance questions

Question

What is the depth of the tree in Figure 4.70? A B K

Answered: 1 week ago