What is the total investment in the new machine

Reference no: EM13831218

The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It is considering the addition of a new office machine, which will not result in any new sales but will save the company $105,500 before taxes per year over its 5-year useful life. The machine will cost $300,000 plus another $12,000 for installation. The new asset will be depreciated using aa modified accelerated cost recovery system (MACRS) 5-year class life. It will be sold for $25,000 at the end of 5 years. Additional inventory of $11,000 will be required for parts and maintenance of the new machine. The company evaluates all projects at this risk level using an 11.99% required rate of return. The tax rate is expected to be 35% for the next decade.

Tasks:

Answer the following questions:

What is the total investment in the new machine at time = 0 (T = 0)?
What are the net cash flows in each of the 5 years of operation?
What are the terminal cash flows from the sale of the asset at the end of 5 years?
What is the NPV of the investment?
What is the IRR of the investment?
What is the payback period for the investment?
What is the profitability index for the investment?
According to the decision rules for the NPV and those for the IRR, is the project acceptable?
Is there a conflict between the two decision methods? If so, what would you use to make a recommendation?
What are the pros and cons of the NPV and the IRR? Explain your answers.

Reference no: EM13831218

Questions Cloud

Suppose both product and factor markets are competitive : Suppose both product and factor markets are competitive, why is the labour demand curve downward sloping? How does technological progress shift the labour demand curve? Professors, lawyers and doctors receive similar amounts of education, why are pro..

Between average total cost and average variable cost : The gap between average total cost (ATC) and average variable cost (AVC) becomes larger when output increases. Marginal cost curve cuts the lowest point of the average cost curve.

Indicate changes in consumer surplus and producer surplus : What will happen to the equilibrium price and quantity of hairy crabs if: Use a diagram to show the tax burden on buyers and sellers and briefly explain your answer. (ii) use a separate diagram to indicate the changes in consumer surplus and producer..

Discuss the provisions of the securities act : Discuss the provisions of the Securities Act of 1934 with particular emphasis on the concept of insider trading.

What is the total investment in the new machine : The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It is considering the addition of a new office machine, which will not result in any new sales but will save the company $105,500 before taxes per year over its 5-year useful..

What will happen to the equilibrium interest rate : Explain using the money market graph, what happens when (1) the price level (CPI) goes up, (2) when the discount rate is lowered and (3) when the Fed sells more bonds on the market. What will happen to the equilibrium interest rate in each case?

Partnership-corporation and limited liability company : Discuss the advantages and disadvantages of doing business as a Sole Proprietorship, Partnership, Corporation and Limited Liability Company.

Starting a new business what type of organization : If you were starting a new business what type of organization, ie. sole proprietorship, partnership, limited liability company or corporation, would you select? What would be the advantages and disadvantages of your selected organization? Would you..

Monetary policy is easier to make than fiscal policy : Do you think that monetary policy is easier to make than fiscal policy? Why is one easier or harder than the other? What is the Goal of each of the policies? Are the goals in conflict or complements of each other?

User Account

All Pages