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9 Nov 2019

The supervisor of the county Department of Transportation (DOT) is considering the replacement of some machinery. This machinery has zero book value but its current market value is $1,000. One possible alternative is to invest in new machinery, which has a cost of $41,000. This new machinery would produce estimated annual operating cash savings of $13,500. The estimated useful life of the new machinery is four years. The DOT uses straight-line depreciation. The new machinery has an estimated salvage value of $2,200 at the end of four years. The investment in the new machinery would require an additional investment in working capital of $3,000, which would be recovered after four years.

If the DOT accepts this investment proposal, disposal of the old machinery and investment in the new equipment will take place on December 31, 20x1. The cash flows from the investment will occur during the calendar years 20x2 through 20x5.


Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

Prepare a net-present-value analysis of the county DOT’s machinery replacement decision. The county has a 10 percent hurdle rate. (Round your "Discount factors" to 3 decimal places and final dollar amounts to whole dollars. Negative amounts should be indicated by a minus sign.)

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.A corporation has an investment opportunity that will involve a time zero $110,000 depreciable cost for machinery and equipment. It will be depreciated starting in year 1 with an additional machinery and equipment expenditure of $60,000 at the end of year 1. Use 7 year life modified ACRS depreciation for all equipment with the half year convention in the first year. Working capital investment of $30,000 is required at time zero. Income attributed to this investment is $200,000 in year 1 and $300,000 per year in years 2 and 3. Operating costs are estimated to be $150,000 the first year and $180,000 per year in years 2 and 3. The effective tax rate is 40%. It is estimated that the business developed by this investment could be sold at the end of year 3 for $250,000 (including equipment and working capital). What discounted cash flow rate of return would be earned by this investment opportunity? What is the NPV at the 15% DCFROR?

A) DCFROR = 39.26%; NPV @ 15% = +90,628
B) DCFROR = 37.17%; NPV @ 15% = +90,628
C) DCFROR = 39.26%; NPV @ 15% = +77,653

A corporation has an investment opportunity that will involve a time zero $110,000 depreciable cost for machinery and equipment. It will be depreciated starting in year 1 with an additional machinery and equipment expenditure of $60,000 at the end of year 1. Use 7 year life modified ACRS depreciation for all equipment with the half year convention in the first year. Working capital investment of $30,000 is required at time zero. Income attributed to this investment is $200,000 in year 1 and $300,000 per year in years 2 and 3. Operating costs are estimated to be $150,000 the first year and $180,000 per year in years 2 and 3. The effective tax rate is 40%. It is estimated that the business developed by this investment could be sold at the end of year 3 for $250,000 (including equipment and working capital). What discounted cash flow rate of return would be earned by this investment opportunity? What is the NPV at the 15% DCFROR?

A) DCFROR = 39.26%; NPV @ 15% = +77,653
B) DCFROR = 37.17%; NPV @ 15% = +90,628
C) DCFROR = 39.26%; NPV @ 15% = +90,628
D) DCFROR = 37.17%; NPV @ 15% = +77,653

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