Worthington Manufacturing Company owns a machine with the following
characteristics:
Current market value $30,000
Net book value $24,000
Remaining useful life 6 years
Capacity in units 14,000
Fixed cash operating costs $18,000 per year
Annual depreciation $ 4,000 (straight-line)
Salvage value after 6 years $10,000
The product made on the machine sells for $5 and has variable costs
of $2 per unit. The sales manager believes he could sell 20,000 units per
year at $5 if the firm had the capacity. A new machine with a capacity
of 22,000 units per year is available. Data follow:
Cost $60,000
Fixed cash operating costs $24,000 per year
Useful life 6 years
The new machine qualifies as 5-year property for ACRS depreciation.
(5-year ACRS rates are 20%, 32%, 19.2%, 11.5%, 11.5%, and 5.8%.) It will
have a no salvage value at the end of 6 years. The firm uses 20% as the
cost of capital and has a tax rate of 40%. Use the incremental approach
and the spreadsheet to solve recommend whether Worthington should acquire
the new machine.
CB2
(Multiple, mathematically correct internal rates of return)
Beryl Products is considering the following two pieces of machinery:
Cost
Yr. 1 after-tax cash flows
Yr. 2 after-tax cash flows
Machine 1
$550,000
$355,000
$300,000
Machine 2
$500,000
$200,000
$410,000
a) Which machine should be purchased if the relevant discoutnrate is
8%? 15% 125%
b) Which machine should be purchased if evaluated using IRR?
CB3
Use the information from Inclass Project #3 and complete the following
calculation.
If the pretax contribution margin is estimated to be $130,000 annually
and the fixed costs, working capital needs, original investment, and life
remain as stated above, what is the annual amount of research funds that
Stump could expend in years one through three and still have a positive
NPV of $10,000?