Develop the relevant cash flows needed to analyze

Reference no: EM13279924

Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1.2 million and requires instillation costs of $150,000. The existing machine can be sold currently for $185,000 before taxes. It is two years old, cost $800,000 new, and has a $384,000 book value and a remaining useful life of 5 years. It was being depreciated under MACRS using a 5 year recovery period and therefore has the final 4 years of depreciation remaining. If it is held for 5 more years, the machine's market value at the end of year 5 will be $0. Over its 5 year life, the new machine should reduce operating costs by $350,000 per year. The new machine will be depreciated under MACRS using a 5 year recovery periods. The new machine can be sold for #200,000 net of removal and cleanup costs at the end of 5 years. An increased investment in net working capital of $25,000 will be needed to support operations if the new machine is acquired. Assume that the firm has adequate operating income against which to deduct any loss experienced on the sale of the existing machine. The firm has a 9% cost capital and is subject to a 40% tax rate.

a. Develop the relevant cash flows needed to analyze the proposed replacement.
b. Determine the net present value (NPV) of the proposal.
c. Determine the internal of return (IRR) of the proposal.
d. Make a recommendation to accept or reject the replacement proposal, and justify your answer.
e. What is the highest cost of capital that the firm could have and still accept the proposal? Explain.

Reference no: EM13279924

Questions Cloud

What is the approximate market value of the bond : A 14-year zero-coupon bond was issued with a $1000 par value to yield 12%. What is the approximate market value of the bond?

What gravitational potentialenergy is gained by refrigerator : A mover's dolly is used to deliver a refriger- ator up a ramp into a house. What gravitational potential energy is gained by the refrigerator

What must the risk-free rate be : A stock has an expected return of 13.3 percent, its beta is 1.45, and the expected return on the market is 10.5 percent. What must the risk-free rate be?

Find capacity of cascade connection of n-channel : Find the capacity of the cascade connection of n binary-symmetric channels with same crossover probability ε. what is the capacity when the number of channels n=2.

Develop the relevant cash flows needed to analyze : Assume that the firm has adequate operating income against which to deduct any loss experienced on the sale of the existing machine. The firm has a 9% cost capital and is subject to a 40% tax rate.

Explain the concept of entrustment to a merchant : Explain what a "merchant" is for purposes of the UCC. explain the concept of "entrustment" to a merchant.

Generate signal from handel-mat with the appropriate number : Several copies of the signal, shifted in time and frequency as well as attenuated, are received-that is, the transmission is done over multiple paths each attenuating and shifting the sent signal. The sum of these versions of the signal appears qu..

How many years would it take you to make the trip : Suppose you decide to travel to a star 85 light-years away at a speed that tells you the distance is only 10 light-years

Explain the buyer''s right of inspection : Explain the buyer's right of inspection in connection with a purchase of goods. Why is this right important? Who must bear the cost of inspecting the goods, and when?

User Account

All Pages