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Questions-Making Capital Investment Decision

Questions-Making Capital Investment Decision. Q1). Massey Machine Shop is considering a five-year project to improve its production efficiency. Buying a new machine press for $480,000 is estimated to result in $195,000 in annual pretax cost savings.

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Questions-Making Capital Investment Decision

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  1. Questions-Making Capital Investment Decision

  2. Q1) • Massey Machine Shop is considering a five-year project to improve its production efficiency. • Buying a new machine press for $480,000 is estimated to result in $195,000 in annual pretax cost savings. • The press falls in the five-year straight line depreciation class, and it will have a salvage value at the end of the project of $81,000. • The press also requires an initial investment in spare parts inventory of $21,000, along with an additional $2,600 in inventory for each succeeding year of the project. • The shop’s tax rate is 30 percent and its discount rate is 8 percent. • NPV?

  3. Q2) • Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. • System A costs $260,000, has a four-year life, and requires $80,000 in pretax annual operating costs. • System B costs $366,000, has a six-year life, and requires $74,000 in pretax annual operating costs. • Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. • Whichever system is chosen, it will not be replaced when it wears out. • The tax rate is 30 percent and the discount rate is 9 percent. • NPV for both convertor belt systems? • EACs for both convertor belt systems?

  4. Q3) • Vandalay Industries is considering the purchase of a new machine for the production of latex. • Machine A costs $3,054,000 and will last for six years. • Variable costs are 35 percent of sales, and fixed costs are $200,000 per year. • Machine B costs $5,238,000 and will last for nine years. • Variable costs for this machine are 30 percent and fixed costs are $135,000 per year. • The sales for each machine will be $10.2 million per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis. • The company plans to replace the machine when it wears out on a perpetual basis • NPVs and EACs?

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