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You have identified a major improvement to your facility which will require engineering analysis and capital improvements. Your company s tax rate is 3 7
You have identified a major improvement to your facility which will require engineering analysis and capital improvements. Your companys tax rate is and its minimum acceptable rate of recovery is The engineering design labor costs will incur an expense of $k during the first year and $k during the second year. The capital improvements will cost $k during the second year and will have a $kyear maintenance expense thereafter. The capital costs will be depreciated over years, with double declining balance method for the first years and straightline depreciation for the second years with no salvage value do not worry about MACRS or year conventions Once the new equipment is installed, the improvement will result in an increase in revenue by $kyear beginning in year The equipment has a year life after it is installed.
If the equipment is installed in during what year will this investment break even?
What is the IRR of this investment?
Is this still an attractive investment even if maintenance costs triple after the equipment has been operating for years? Show why.
By reducing the labor expenses in the design phase, you can reduce this problem to break even in only years after installation of the equipment during What is the minimum percent reduction, applied to both years, in those labor expenses to accomplish this?
Assuming the original labor expenses, what percent increase in annual revenue would you need to break even in the th year after installation of the equipment?
As an alternative to the original plan, during year of the engineering design, you come up with an engineering modification that will increase revenue improvements by $ky but cost an additional $k of engineering labor during year and $k of capital investment when the equipment is installed. Is this better than the original plan? Show why.
As an alternative to paying cash for the equipment, you can take out a loan for of the capital cost, to be repaid over years at a interest rate. The principal will be paid back in equal installments.
What is the IRR of the loan option for the original plan?
Using incremental internal rate of return analysis, indicate whether the cash or loan option is better.
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