Should the firm purchase the new equipment

Reference no: EM13169531

Question

A firm believes it can generate an additional $260,000 per year in revenues for the next 5 years if it replaces existing equipment that is no longer usable with new equipment that costs $280,000. The firm expects to be able to sell the new equipment when it is finished using it (after 5 years) for $20,000. The existing equipment has a book value of $35,000 and a market value of $25,000. Variable costs are expected to total 70% of revenue. The additional sales will require an initial investment in net working capital of $26,000, which is expected to be recovered at the end of the project (after 5 years). Assume the firm uses straight line depreciation, its marginal tax rate is 35%, and its weighted-average cost of capital is 10%.

a) How much value will this new equipment create for the firm?

b) At what discount rate will this project break even?

c) Should the firm purchase the new equipment?

Reference no: EM13169531

Questions Cloud

Explain batch-related and product-sustaining activities : Describe the differences between unit-related, batch-related, and product-sustaining activities. Give one example of each type of activity and describe the difference between transaction drivers and duration drivers. When would one type be preferre..

What will happen to the pressure inside container a : Container A (with porous walls) is filled with air at STP. It is then inserted into a large enclosed container (B) which is then flushed with H2(g). What will happen to the pressure inside container A?

What is the partial pressure of oxygen in the mixture : a gasous mixture of oxygen and nitrogen contains 32.8% nitrogen by mass. what is the partial pressure of oxygen in the mixture if the total pressure is 405mmHG?

What is the partial pressure of each component : A mixture of 2.20 moles of gas A and 5.81 moles of gas B has a total pressure of 0.794 atm. What is the partial pressure of each component?

Should the firm purchase the new equipment : How much value will this new equipment create for the firm and at what discount rate will this project break even and should the firm purchase the new equipment?

What are the concentrations of barium and sulfate ions : A solution is prepared by mixing 75.0 mL of 0.030 M BaCl2 and 250. mL of 0.040 M K2SO4. What are the concentrations of barium and sulfate ions in this solution? Assume only SO42- ions (no HSO4-) are present.

What are the investments payback period : What are the investment's payback period, IRR, and NPV, assuming the firm's WACC is 9% and if the firm requires a payback period of less than 5 years, should this project be accepted?

For what sodium ethoxide in ethanol-water is used : ethoxypropan-2-ol can be made by the ring opening of an epoxide when sodium ethoxide in ethanol-water is used. A) Draw the skeletal structure of (R)-1-ethoxypropan-2-ol.

Describe an alternative income-statement format : Explain why the product-line income statement as presented is not suitable for analysis and decision making and describe an alternative income-statement format that would be more suitable for analysis and decision making, and explain why it is bette..

User Account

All Pages