Question

Occhi grandi Company is considering replacing an old machine, which is totally depreciated using the straight-line method with zero book value; however, it can be sold as a secondhand machine to another company for $6,000. The new machine can be purchased for $43,500, including installation. The machine reduces the labor cost of the company by $16,500 per year and reduces damages by $400 per month. However, electricity costs will go up by $100 per month and maintenance costs by $900 per month. The machine has no effect on sales. The operation of the new machine requires an increase of $4,000 in NWC The machine falls into a 5-year MACRS class. The life of the project is expected to be six years, at which time the company sells the machine for $5,000. The Company tax rate is 21 percent, and its WACC for this project is 9.44 percent. What is the NPV of this project? Please explain your approach in a few lines.

          Occhi grandi Company is considering replacing an old machine, which is totally depreciated using the straight-line method with zero book value; however, it can be sold as a secondhand machine to another company for $6,000. The new machine can be purchased for $43,500, including installation. The machine reduces the labor cost of the company by $16,500 per year and reduces damages by $400 per month. However, electricity costs will go up by $100 per month and maintenance costs by $900 per month. The machine has no effect on sales. The operation of the new machine requires an increase of $4,000 in NWC The machine falls into a 5-year MACRS class. The life of the project is expected to be six years, at which time the company sells the machine for $5,000. The Company tax rate is 21 percent, and its WACC for this project is 9.44 percent.
What is the NPV of this project? Please explain your approach in a few lines.

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Occhi grandi Company is considering replacing an old machine, which is totally depreciated using the straight-line method with zero book value; however, it can be sold as a secondhand machine to another company for 6,000. The new machine can be purchased for43,500, including installation. The machine reduces the labor cost of the company by 16,500 per year and reduces damages by400 per month. However, electricity costs will go up by 100 per month and maintenance costs by900 per month. The machine has no effect on sales. The operation of the new machine requires an increase of 4,000 in NWC The machine falls into a 5-year MACRS class. The life of the project is expected to be six years, at which time the company sells the machine for5,000. The Company tax rate is 21 percent, and its WACC for this project is 9.44 percent.
What is the NPV of this project? Please explain your approach in a few lines.

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Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

Instant Answer

Solved by Expert Supreeta N

08/01/2023

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Step 1: Calculate the initial investment required for the new machine. Show more…

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The NPV of the project is calculated by discounting the cash flows generated by the new machine at the company's weighted average cost of capital (WACC) over the six-year life of the project. The initial investment, annual cash flows, salvage value, and tax implications are all taken into account to determine the net present value.

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Transcript

00:01 Hello students, here is a question.

00:02 A new project involves the purchase of $9000 food processing machine.

00:07 The machine would be depreciated on a straight line basis over a 3 years ' useful life and a book value is $672.

00:14 At the end of a life of a project, the machine will sold an estimated of $120.

00:19 The project will cause increased sale of $6354 and each year through 3, it is expected that enhance efficiency and reduce the operating expenses of $1784 in each year.

00:32 The project will require an increase amount receivable is $1087 and increase in accounts payable of $1200.

00:40 The project impact of these account is expected to disappear at a project.

00:46 The firm marginal tax rate is 40 % and wacc is 12%.

00:50 So, we need to calculate the npv for this project.

00:53 So, let us start solving this.

00:55 Net present value is a technical of a capital budgeting to involve a project and helps to determine whether the project is viable or not.

01:03 So, net present value is a difference between the present value and the cash flow and initial investment of a project.

01:10 So, initial cost of a machine is $9000 and annual cash flow is $8400 .2.

01:50 So, now we will calculate the net present value.

01:53 So, net present value will be initial investment, initial investment that is $11287.

02:13 So, i is equal to 1, 2%.

02:19 So, the columns will be year cash flow into pv factor equals to present value...

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