Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The production line would be set up in unused space in Solomons' main plant. The machinerys invoice price would be approximately $175,000, another $9,000 in
The production line would be set up in unused space in Solomons' main plant. The machinerys invoice price would be approximately $175,000, another $9,000 in shipping charges would be required, and it would cost an additional $20,000 to install the equipment. The machinery has an economic life of 4 years, and Solomons has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $20,000 after 4 years of use. | ||||||||
The new line would generate incremental sales of 1,150 units per year for 4 years at an incremental cost of $105 per unit in the first year, excluding depreciation. Each unit can be sold for $195 in the first year. The sales price and cost are both expected to increase by 2% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by an amount equal to 11% of sales revenues. The firms tax rate is 35%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 9%. |
Part I: Input Data | ||||||
Equipment cost | Key Output: NPV = | |||||
Shipping charge | ||||||
Installation charge | ||||||
Economic Life | ||||||
Salvage Value | ||||||
Tax Rate | ||||||
Cost of Capital | ||||||
Units Sold | ||||||
Sales Price Per Unit | ||||||
Incremental Cost Per Unit | ||||||
NWC/Sales | ||||||
Inflation rate |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started