A new furnace for your small factory is being installed right now, will cost $35,000, and will be completed in one year. At that point, it will require ongoing maintenance expenditures of $2,300 a year. But it is far more fuel-efficient than your old furnace and will reduce your consumption of heating oil by 3,200 gallons per year. Heating oil this year costs $3 a gallon; the price per gallon is expected to increase by $0.50 a year for the next 3 years and then to stabilize for the foreseeable future. The furnace will last for 20 years from initial use, at which point it will need to be replaced and will have no salvage value. (Specifically, the firm pays for the furnace at time O and then reaps higher net cash flows from that investment at the end of years 1 - 20.) The discount rate is 12%. a. What is the net present value of the investment in the furnace? Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar. b. What is the IRR? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. What is the payback period? d. What is the equivalent annual cost of the furnace? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. e. What is the equivalent annual savings derived from the furnace? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. f. Compare the PV of the difference between the equivalent annual cost and savings to your answer to part (a). Are the two measures the same or is one larger? a. NPV b. IRR $ 51,248 31.41 % c. Cumulative cash flows are positive in: d. Equivalent annual cost $ 4,685.76 e. Equivalent annual savings $ 11,546.73 f. Are the two measures the same or is one larger? Same
Added by Benjamin W.
Close
Step 1
Step 1: Read through the text carefully to check for any spelling or typographical errors. Show more…
Show all steps
Your feedback will help us improve your experience
Akash M and 97 other Principles of Accounting educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Recommended Videos
Present value of $1 Periods 6% 8% 10% 12% 14% 16% 1 0.94340 0.92593 0.90909 0.89286 0.87719 0.86207 2 0.89000 0.85734 0.82645 0.79719 0.76947 0.74316 3 0.83962 0.79383 0.75131 0.71178 0.67497 0.64066 4 0.79209 0.73503 0.68301 0.63552 0.59208 0.55229 5 0.74726 0.68058 0.62092 0.56743 0.51937 0.47611 6 0.70496 0.63017 0.56447 0.50663 0.45559 0.41044 7 0.66506 0.58349 0.51316 0.45235 0.39964 0.35383 8 0.62741 0.54027 0.46651 0.40388 0.35056 0.30503 9 0.59190 0.50025 0.42410 0.36061 0.30751 0.26295 10 0.55839 0.46319 0.38554 0.32197 0.26974 0.22668 Present value of an annuity of $1 Periods 6% 8% 10% 12% 14% 16% 1 0.94340 0.92593 0.90909 0.89286 0.87719 0.86207 2 1.83339 1.78326 1.73554 1.69005 1.64666 1.60482 3 2.67301 2.57710 2.48685 2.40183 2.32163 2.24589 4 3.46511 3.31213 3.16987 3.03735 2.91371 2.79818 5 4.21236 3.99271 3.79079 3.60478 3.43308 3.27429 6 4.91732 4.62288 4.35526 4.11141 3.88867 3.68474 7 5.58238 5.20637 4.86842 4.56376 4.28830 4.03857 8 6.20979 5.74664 5.33493 4.96764 4.63886 4.34359 9 6.80169 6.24689 5.75902 5.32825 4.94637 4.60654 10 7.36009 6.71008 6.14457 5.65022 5.21612 4.83323 Layton Company is considering two competing projects that will change its current manufacturing process. The after-tax cash flows associated with the two investments are as follows: Year Project X Project Y 0 $(75,000) $(290,000) 1 --- 167,095 2 100,920 167,095 The company's cost of capital is 12%. A. Compute the net present value for Project X. (Round answer to the nearest dollar.) B. Compute the net present value for Project Y. (Round answer to the nearest dollar.) C. Compute the internal rate of return for Project X. (Round discount factor to five decimal places.) D. Compute the internal rate of return for Project Y. (Round discount factor to five decimal places.)
Akash M.
1.) The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $ 80,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $ 5,000. The computer would increase the firm's before-tax revenues by $30,000 per year but would also increase operating costs by $ 16,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent. What is the net cash flow at t = 0? (Must be a negative number.) 2.) The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $ 6 ,000. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $ 20 ,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent. What is the total value of the terminal year non-operating cash flows at the end of Year 3? Year MACRS % 1 0.33 2 0.45 3 0.15 4 0.07 3.) Mars Inc. is considering the purchase of a new machine that costs $60,000. This machine will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS accelerated method (shown below) to depreciate the machine, and it expects to sell the machine at the end of its 5-year life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but the net working capital will return to the original level when the project is over (i.e., after 5 years). Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. Calculate the net cash flows of the project. (Cash outflows should be negative number.) Year MACRS Percentage 1 0.20 2 0.32 3 0.19 4 0.12 5 0.11 6 0.06
BETHESDA MINING COMPANY Bethesda Mining is a mid-sized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentucky. The company operates deep mines as well as strip mines. Most of the coal mined is sold under contract, with excess production sold on the spot market. The coal mining industry, especially high-sulfur coal operations such as Bethesda, has been hard-hit by environmental regulations. Recently, however, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Bethesda has just been approached by Mid-Ohio Electric Company with a request to supply coal for its electric generators for the next four years. Bethesda Mining does not have enough excess capacity at its existing mines to guarantee the contract. The company is considering opening a strip mine in Ohio on 5,000 acres of land purchased 10 years ago for $4 million. Based on a recent appraisal, the company feels it could receive $6.5 million on an after-tax basis if it sold the land today. Strip mining is a process where the layers of topsoil above a coal vein are removed and the exposed coal is removed. Some time ago, the company would simply remove the coal and leave the land in an unusable condition. Changes in mining regulations now force a company to reclaim the land; that is, when the mining is completed, the land must be restored to near its original condition. The land can then be used for other purposes. Because it is currently operating at full capacity, Bethesda will need to purchase additional necessary equipment, which will cost $95 million. The equipment will be depreciated on a seven-year MACRS schedule. The contract runs for only four years. At that time, the coal from the site will be entirely mined. The company feels that the equipment can be sold for 60 percent of its initial purchase price in four years. However, Bethesda plans to open another strip mine at that time and will use the equipment at the new mine. The contract calls for the delivery of 500,000 tons of coal per year at a price of $86 per ton. Bethesda Mining feels that coal production will be 620,000 tons, 680,000 tons, 730,000 tons, and 590,000 tons, respectively, over the next four years. The excess production will be sold in the spot market at an average of $77 per ton. Variable costs amount to $31 per ton, and fixed costs are $4,100,000 per year. The mine will require a net working capital investment of 5 percent of sales. The NWC will be built up in the year prior to the sales. Bethesda will be responsible for reclaiming the land at termination of the mining. This will occur in Year 5. The company uses an outside company for reclamation of all the company's strip mines. It is estimated the cost of reclamation will be $2.7 million. In order to get the necessary permits for the strip mine, the company agreed to donate the land after reclamation to the state for use as a public park and recreation area. This will occur in Year 6 and result in a charitable expense deduction of $6 million. Bethesda faces a 38 percent tax rate and has a 12 percent required return on new strip mine projects. Assume that a loss in any year will result in a tax credit. Refer to the mini case on Bethesda Mining Company as per the attachment. Make the following assumptions/modifications to the facts of the case: The equipment is depreciated on a 20% WDV basis over the contract period instead of a seven-year MACRS schedule. If you were approached by the President of the company with a request to analyze the investment proposal, how and what would you advise him with respect to the following: I. Should Bethesda Mining take the contract and open the Mine? Give detailed calculations with required metrics/models to support your advice. II. The President further asks you as to what should be that minimum required return below which the project would become unviable and therefore unacceptable? How would you arrive at it and explain it to him? III. Would your advice remain the same if the equipment's salvage value was 50% instead of 60%?
Supreeta N.
Recommended Textbooks
Horngren’s Cost Accounting
Cost Accounting A Managerial Emphasis
Principles of Accounting Volume 1: Financial Accounting
Transcript
Watch the video solution with this free unlock.
EMAIL
PASSWORD