Asset depreciation range, Financial Management

Assignment Help:

Work out and submit the comprehensive problem below.

1. Halstrom Corporation purchased a piece of equipment three years ago for \$230,000. It has an asset depreciation range (ADR) midpoint of eight years. This equipment can be sold now for \$90,000.

A new piece of equipment can be purchased for \$320,000 that would replace the existing equipment. It also has an ADR of eight years.

The new equipment, if purchased, will have a useful life of six years, with no salvage value at the end of that time. If the old equipment is kept, it will be operated for six more years in addition to the three years it has already been operated. It also will have no salvage value at the end of that time.

The old and new equipment would provide the following operating gains or losses (earnings before depreciation, interest, and taxes) over the next six years, beginning with the coming year.

 Table 2 Year New Equipment Old Equipment 1 (1st year of new equip., 4th year of old equip.) \$80,000 \$25,000 2 76,000 16,000 3 70,000 9,000 4 60,000 8,000 5 50,000 6,000 6 45,000 (7,000)

The firm has a 36 percent tax rate and a 9 percent cost of capital. Do the calculations to determine if the new equipment should be purchased to replace the old equipment. Should the new equipment be purchased or should the old equipment be kept in operation?

Be careful here. This problem involves an investment that is supposed to increase profits, whereas the problem in Part 1 involved investing in a machine that would result in a cost savings. While the cash benefit resulting from the purchase of new equipment can come either in the form of a cost savings or an increase in profit, in this case be careful to work with the increase in cash flows resulting from the purchase of the new machine, not merely the profit from the new machine. The fact that the new machine will earn some profit is not sufficient reason to invest in it. It must increase profits enough to justify its purchase. This is easily seen if we consider a case where the new machine will in fact earn a profit, but the profit will actually be less than the existing machine is presently earning. Clearly, one would not purchase such a machine to replace the existing one. It is the increase in cash flows that counts.

Walters model, A Ltd sells goods at Rs.10.P.U. Its variable cost Rs.7.P.U a...

A Ltd sells goods at Rs.10.P.U. Its variable cost Rs.7.P.U and fixed cost amount to Rs.1,70,000 it finances all its assets by equity funds. It pays 40% tax on its income. Z Ltd is

Deficiency in design, Deficiency in Design - This exists when a control ess...

Deficiency in Design - This exists when a control essential to meet the control objective is missing or an existing control isn't properly designed so that even if control operates

Illustrating a straddle, Options Traded on Legal and General August 14  200...

Options Traded on Legal and General August 14  2009 Share   Price         Exercise      Price    Calls       Puts                                 Sep        Dec        Mar

IPO mode in uk

Define the implications of the interest rate parity, Discuss the implicatio...

Discuss the implications of the interest rate parity for the exchange rate determination. Answer: Presume that the forward exchange rate is roughly an unbiased predictor of the

Portfolio duration, We can measure the portfolio duration by calculat...

We can measure the portfolio duration by calculating the weighted average of the duration of the bonds in the portfolio. The proportion of the portfolio that a se

Features of government securities, Features of government securities: ...

Features of government securities: Issuers The government securities are issued by the central government, state governments, and semi-government authorities like municipa

Determination of values price and volume, Determination of values The v...

Determination of values The values for which NPV turns into zero are found by calculating the break-even values for the selected variables. Once determined these give an indica

Federal reserve system forecast, A. Joe wants to invest in Nebraska Municip...

A. Joe wants to invest in Nebraska Municipal 6% GOB that are rated AA. Joe's tax rate is usually between 28% .  GE plans to sell AA rated 8% coupon bonds. Compute Joe's after-tax i

Describe the sales forecasting process, Describe the sales forecasting proc...

Describe the sales forecasting process. It is a group effort. Sales and marketing personnel generally offer assessments of demand and the competition. Production personnel genera