The CSI Corporation is looking to replace an existing printing press with one of two newer...
The CSI Corporation is looking to replace an existing printing press with one of two newer models that are more efficient. The current press is three years old, cost 32,000 and is being depreciated under MACRS using a 5-year recovery period. The first alternative under consideration, Printing Press A, cost $40,000 to purchase and $8,000 to install. It has a 5 year usable life and will be depreciated under MACRS using a 5-year recovery period. The second alternative, press B cost $54,000 to purchase and $6,000 to install. It also has a 5 year usable life and will be depreciated under MACRS using a 5 year recovery period. The purchase of press A would result in a $4,000 increase in net working capital, and the purchase of Press B would increase net working capital by $6,000. The projected Earnings before depreciation interest and taxes for each alternative is presented below.
|
Year |
Press A |
Press B |
Existing press |
|
1 |
25,000 |
22,000 |
14,000 |
|
2 |
25,000 |
24,000 |
14,000 |
|
3 |
25,000 |
26,000 |
14,000 |
|
4 |
25,000 |
28,000 |
14,000 |
|
5 |
25,000 |
28,000 |
14,000 |
The existing press can currently be sold for $18,000 before taxes. At the end of the 5 years the existing press can be sold for $1,000 before taxes. Press A can be sold to net $12,000 before taxes and press B can be sold to net $20,000 before taxes at the end of the 5 year period. The firm is subject to a 40% tax rate.
The company has $100M of debt outstanding with a yield-to-maturity of 8%, and has $150M of equity outstanding with a beta of 0.9. The expected market return is 13% and the risk-free rate is 5%.
What are the 1) discounted payback period 2) NPV 3) IRR 4) MIRR for each?
Homework Answers
Cost of capital (discount rate) = (debt/value*cost of debt*(1-tax rate)) + (equity/value*cost of equity) where
cost of equity = risk-free rate + beta*(market return - risk-free rate) = 5%+0.9*(13%-5%) = 12.20%
Discount rate = ((100/(100+150))*8%*(1-40%)) = ((150/(100+150))*12.20%) = 9.24%
Depreciation schedules:
Existing press:
Note: The press was bought 3 years ago so current book value is 9,216 as per the depreciation schedule.
Press A: Total amount to be depreciated = purchase price + installation cost
Press B: Total amount to be depreciated = purchase price + installation cost
1). Analysis for replacing the existing press with press A:
NPV, IRR, MIRR & discounted payback period:
2). Analysis for replacing the existing press with press B:
NPV, IRR, MIRR & discounted payback period:
6 Formula BVn-1 - Dn -3 32000 Year (n) Book value (BV) Depreciation rate ('r) Depreciation (D) -2 25600 20.00% 6400 -1 15360 32.00% 10240 04 15 9216 55301843 19.20% 11.52% 11.52% 6144 3686 3 686 5.76% 1843 BVO*r
2 3 Formula BVn-1 - Dn 48000 Year (n) Book value (BV) Depreciation rate ('r) Depreciation (D) 38400 20.00% 9600 23040 32.00% 15360 13824 19.20% 9216 8294 11.52% 5530 5 2765 11.52% 5530 5.76% 2765 BVO*r
1 Formula BVn-1 - Dn 60000 Year (n) Book value (BV) Depreciation rate (') Depreciation (D) 48000 20.00% 12000 28800 32.00% 19200 17280 19.20% 11520 10368 11.52% 6912 3456 11.52% 6912 5.76% 3456 BVO*r
0 48000 14486.40 33513.6 25000 14000 11000 9600 3686 5914 Formula Year (n) Purchase price + installation Investment in Press A (11) | Current selling price - 40%*(Current selling price - Current opportunity cost Current book value) of existing press (OC) 11-OC Net initial investment (11) Press A EBITDA (EBITDA1) Existing press EBITDA EBITDA1 - EBITDA2 Incremental EBITDA Press A depreciation (D1) Existing press D1-D2 Inc. depreciation (D) Inc.EBITDA*(1-Tax rate) +(D*Tax Incremental operating rate) cash flow (IOCF) Increase in NWC Selling price -40%*(Selling After-tax salvage value price - Book value) for press A (ASV1) After-tax salvage value Selling price*(1-40%) for existing press (ASV2) Net salvage value (NSV) IOCF - Il - Inc. in NWC + NSV Free cash flow (FCF) 25000 14000 11000 15360 3686 11674 25000 14000 11000 9216 1843 7373 25000 14000 11000 5530 25000 14000 11000 5530 5530 5530 8965.44 11269.44 9549.12 8811.84 8811.84) -4000 4000 8305.92 600 7705.921 20517.8. -37513.6 8965.4 11269.4 9549.1 8811.8
1 2 3 4 5 0 60000 14486.40 45513.6 22000 14000 8000 12000 3686 8314| Formula Year (n) Purchase price + installation Investment in Press B (11) Current selling price 40%*(Current selling price - Current opportunity cost Current book value) of existing press (OC) 11-OC Net initial investment (11) Press B EBITDA (EBITDA1) Existing press EBITDA EBITDA1 - EBITDA2 Incremental EBITDA Press B depreciation (D1) Existing press D1-D2 Inc. depreciation (D) Inc.EBITDA*(1-Tax rate) + (D*Tax Incremental operating rate) cash flow (IOCF) Increase in NWC Selling price -40%*(Selling After-tax salvage value price - Book value) for press B (ASV1) After-tax salvage value Selling price*(1-40%) for existing press (ASV2) Net salvage value (NSV) IOCF - Il - Inc. in NWC + NSV Free cash flow (FCF) 240001 140001 10000 19200 3686 15514 26000 14000) 12000 11520 1843 9677 28000 140001 14000 6912 28000 14000 14000 6912 6912 6912 8125.44 12205.44 11070.72 11164.8 11164.81 -6000 6000 13382.40 600 12782.401 29947.2 -51513.6 8125.4 12205.4 11070.7 11164.8
2 12205.4 8125.4 L 11070.7 | 11164.8 29947.2 Formula Year (n) IOCF - 11 - Inc. in NWC + NSV Free cash flow (FCF) Using NPV() function with FCFS NPV @ 9.24% Using IRR() function with FCFS IRR Using MIRR() function with FCFS & discount rate MIRR -51513.6 1735.85 10.31% 9.97% Discounted payback period: Formula Year (n) Free cash flow (FCF) Discounted FCF (DFCF) Cumulative discounted FCF (CFCF) Fraction of Year 5 Payback period in years) 0 -51513.6 -51513.60 -51513.60 8125.44 7438.15 -44075.45 2 12205.44 10227.98 -33847.46 3 11070.72 8492.41 -25355.05 11164.8 7840.15 -17514.91 FCF/(1+9.64%)an CFCFn = CFCFn-1 + DFCFn (-CFCF4/DFCF5) 4 years + fraction of Year 5 29947.2 19250.75 1735.85 0.91 4.91
Add Answer to:
The CSI Corporation is looking to replace an existing printing
press with one of two newer...
Ne with one of two newer more effective models. The existing crane is 3 years old, cost $32.000 a...
ne with one of two newer more effective models. The existing crane is 3 years old, cost $32.000 and is being depreciated under MACRS using a 5-year recovery period. Although the existing crane has only three years (years 4, 5, and 6) of depreciation remaining under MACRS, it has a remaining usable life of 5 years. Crane A, one of two newer models cost $40,000 to purchase, and $8,000 to install. It has a 5- and will be depreciated under...
what is the payback period , net present Value, Initial rate of return , and MIRR for both machines Question 2...
what is the payback period , net present Value, Initial rate
of return , and MIRR for both machines
Question 2 Staten Island Construction Company is considering replacing an existing crane with one of two newer more effective models. The existing crane is 3 years old, cost $32,000 and is being depreciated under MACRS using a 5-year recovery period. Although the existing crane has only three years of depreciation remaining under MACRS, it has a remaining usable life of 5...
4] ROK decided to replace an existing asset with a newer model. Two years ago, the existing asset...
4] ROK decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and has been depreciated under MACRS using a 5-year recovery period (Le., 20%12.. Iomhliszt LLS2hS70%. The esisting asset can be sold for S25.000 after 2-year use. The new asset will cost $75,000 plus $5,000 for shipping and installation. The new asset will be depreciated under MACRS using a S-year recovery period. In addition, ROK expects that the new asset...
Integrative Complete investment decision Wells Printing is considering the purchase of a new printing press. The...
Integrative Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is S2.27 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1.07 million 10 years ago, and can be sold currently for $1.24 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected...
A small factory is considering replacing its existing coining press with a newer, more efficient one....
A small factory is considering replacing its existing coining press with a newer, more efficient one. The existing press was purchased five years ago at a cost of $200,000, and it is being depreciated according to a 7-year MACRs depreciation schedule and the first five years of depreciation have been taken (see below for MACRs chart). The CFO estimates that the existing press has 6 years of useful life remaining. The purchase price for the new press is $306,000. The...
Question Help P11-29 (similar to) Integrative-Complete investment decision Wells Printing is considering the purchase of a...
Question Help P11-29 (similar to) Integrative-Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.27 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $0.97 million 10 years ago, and can be sold currently for $1.23 million before taxes. As a result of acquisition of the new press, sales in each of the next...
Initial investment —Basic calculation Cushing Corporation is considering the purchase of a new grading machine to...
Initial investment —Basic calculation Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 33 years ago at an installed cost of $19,500; it was being depreciated under MACRS using a 5-year recovery period. (See table for the applicable depreciation percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $35,400 and requires $4,700 in installation costs; it...
P11-28 (similar to Question Help * Integrative Complete investment decision Wells Printing is considering the purchase...
P11-28 (similar to Question Help * Integrative Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.22 million This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1.02 million 10 years ago, and can be sold currently for $1.25 million before taxes. As a result of acquisition of the new press, sales in each of...
Initial investment: Basic calculation Cushing Corporation is considering the pur- chase of a new grading machine...
Initial investment: Basic calculation Cushing Corporation is considering the pur- chase of a new grading machine to replace the existing one. The existing machine was purchased 3 years ago at an installed cost of $20,000; it was being depreciated under MACRS, using a 5-year recovery period. (See Table 4.2 for the applicable depreciation percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $35,000 and requires $5,000 in instal-...
P11-12 (similar to) E Question Help Initial investment-Basic calculation Cushing Corporation is considering the purchase of...
P11-12 (similar to) E Question Help Initial investment-Basic calculation Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 4 years ago at an installed cost of $20,600, it was being depreciated under MACRS using a 5-year recovery period. (See table for the applicable depreciation percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $34,200 and requires...
ne with one of two newer more effective models. The existing crane is 3 years old, cost $32.000 and is being depreciated under MACRS using a 5-year recovery period. Although the existing crane has only three years (years 4, 5, and 6) of depreciation remaining under MACRS, it has a remaining usable life of 5 years. Crane A, one of two newer models cost $40,000 to purchase, and $8,000 to install. It has a 5- and will be depreciated under...
what is the payback period , net present Value, Initial rate
of return , and MIRR for both machines
Question 2 Staten Island Construction Company is considering replacing an existing crane with one of two newer more effective models. The existing crane is 3 years old, cost $32,000 and is being depreciated under MACRS using a 5-year recovery period. Although the existing crane has only three years of depreciation remaining under MACRS, it has a remaining usable life of 5...
4] ROK decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and has been depreciated under MACRS using a 5-year recovery period (Le., 20%12.. Iomhliszt LLS2hS70%. The esisting asset can be sold for S25.000 after 2-year use. The new asset will cost $75,000 plus $5,000 for shipping and installation. The new asset will be depreciated under MACRS using a S-year recovery period. In addition, ROK expects that the new asset...
Integrative Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is S2.27 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1.07 million 10 years ago, and can be sold currently for $1.24 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected...
Question Help P11-29 (similar to) Integrative-Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.27 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $0.97 million 10 years ago, and can be sold currently for $1.23 million before taxes. As a result of acquisition of the new press, sales in each of the next...
P11-28 (similar to Question Help * Integrative Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.22 million This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1.02 million 10 years ago, and can be sold currently for $1.25 million before taxes. As a result of acquisition of the new press, sales in each of...
Initial investment: Basic calculation Cushing Corporation is considering the pur- chase of a new grading machine to replace the existing one. The existing machine was purchased 3 years ago at an installed cost of $20,000; it was being depreciated under MACRS, using a 5-year recovery period. (See Table 4.2 for the applicable depreciation percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $35,000 and requires $5,000 in instal-...
P11-12 (similar to) E Question Help Initial investment-Basic calculation Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 4 years ago at an installed cost of $20,600, it was being depreciated under MACRS using a 5-year recovery period. (See table for the applicable depreciation percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $34,200 and requires...
Most questions answered within 3 hours.
-
Where is the error in this code sequence?
String s1 = "Hello";
String s2 = "ello";...
asked 10 months ago -
Financial data for Joel de Paris, Inc., for last year
follow:
Joel de Paris, Inc.
Balance...
asked 10 months ago -
Consider this reaction:
Al2(SO4)3 (aq)+ BaCl3
(aq) Al2Cl6 (aq)- +
3BaSO4(s) . What is the...
asked 10 months ago -
Suppose that Savneet is considering increasing her
recent random sample from 20 car rentals to 40...
asked 10 months ago -
Trucks arrive at an unloading terminal at an average rate of 120
per hour.
Trucks arrive...
asked 10 months ago -
Why are methanol and ethanol completely soluble in water while
octanol is not very little soluble....
asked 10 months ago -
A facilities manager at a university reads in a research report
that the mean amount of...
asked 10 months ago -
When the CuSO4 is rehydrated by adding water to the anhydrous
compound, is this an endothermic...
asked 10 months ago -
A ray of sunlight is passing from diamond into crown glass; the
angle of incidence is...
asked 10 months ago -
A block of mass 0.249 kg is placed on top of a light, vertical
spring of...
asked 10 months ago -
how do the kidneys compensate in the presences of acidosis
a) trigger hyperventilate
b) reserve acid...
asked 10 months ago -
Question 501 pts
The rental rate of capital to the firm increases. Which of the
following...
asked 10 months ago