replacement decision, Corporate Finance

Assignment Help:
#question.Baobab rolling mills owns a lathe machine which was purchased 10years ago at sh. 75 million. The machine had an expected life of 15 yrs at the time it was purchased, and management estimated, and still believes, that the salvage value will be zero at the end of its 15 yrs life. The machine is being depreciated at on a straight line basis, therefore ots annual depreciation charge is sh. 5 million, and its present book value is sh.25 million. The R&D manager reports that a new special purpose machine can be purchased for sh. 120 million(including freight and installation of sh. 10 million and 30 million respectively) which, over itd 5 year life will reduce labour and raw materials usage sufficient to cut operating costs from sh. 70 million to sh. 40 million. It is estimated that the new machine can be sold for sh. 20 million at the end of its life. The old machine actual current market value is sh. 10 million, which is below its sh. 25 million book value. If the new machine were acquired, the old lathe would be sold to another company. Networking capital requirements will increase by sh. 10 million at the time of replacement. The company is in 40% tax bracket and the cost of capital is 12%. The company will maintain the straight basis of depreciating similar machines. Determine the following:
Net cashflows at the time of replacement?
incremental cashflows over the life of the new lathe?
net terminal cashflows at the end of new machines life?
payback period for the replacement decision?
net present value of the new lathe?
the replacement decision internal rate of return?
should the decision to replace be undertaken?
.

Related Discussions:- replacement decision

Antamina mines, i need to find out how quickly i could get some answers to ...

i need to find out how quickly i could get some answers to stock valuation questions on antamina mines case and how cheaply

LEVERAGE, what will be impact on the operating leverage of a firm if it pr...

what will be impact on the operating leverage of a firm if it proceeds for additional borrowings

Standard deviations and correlations, Suppose you are given the expected ye...

Suppose you are given the expected yearly returns and standard deviations and correlations shown in the tables below: The market portfolio has an expected return of 18% and

Investment diversification strategy, The Brazilian economy in 2001 and...

The Brazilian economy in 2001 and 2002 had gone up and down. The Brazilian "real" (R$) had also been declining since 1999 (when it was floated). Investors wished to

Market-adjusted and two-factor models - event study, Market-Adjusted and Tw...

Market-Adjusted and Two-Factor Models - Event Study As mentioned previously, you can use several alternative models to calculate a security's expected return. The market-adjus

Find the equilibrium price and quantity in market, The widget market is com...

The widget market is competitive and includes no transaction costs. Five suppliers are willing to sell one widget at the following prices: $30, $29, $20, $16, and $12. Five buyers

Merger and aquisition, It is given that company A will acquire company B wi...

It is given that company A will acquire company B with shares of common stock. Present earnings of A is rs. 20 million and of company B is rs. 5 million. Earning price per share of

Answer required ., What will be impact on the operating leverage of a firm,...

What will be impact on the operating leverage of a firm, if it proceeds for additional borrowings?

The Cost of Equity Capital and the CAPM, Part II The cost of equity (disco...

Part II The cost of equity (discount rate) can also be determined by using the Capital Asset Pricing Model (CAPM). Calculating the cost of equity using the CAPM model is often mor

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd