I need you to do the following questions I have uploaded. Let me know If you have any further questions.General Directions:
All course material may be used.
Analysis should include tax effects for all problems unless the problem states otherwise.
This should be submitted as one pdf of solved problems and one excel workbook
with problems solved in excel, to me.
1. Your company, Performance Machines produces a variety of specialized components for
turbines and industrial power transmission systems, including large springs. While you have
automatic machines capable of making spring less than 0.375” gage, anything larger currently
must be made by hand. At a trade show you identified a machine that is capable of automating
spring production for gages between 0.375” to 0.75”. The machine will cost
$150,000 and will require another $18,000 in commissioning costs. Using this automatic
machine is expected to decrease costs by $44,000 annually, is expected to last for 10 years,
should be depreciated on a 7 year MACRS schedule, and will have a salvage value $1,000.
a. Your firm uses a MARR of 10% and has a marginal tax rate of 35%. Develop an income
statement and cash flow statement for this machine. Should this project be accepted or
b. When you were developing your proposal you spoke with the business capture team.
They informed you that while your understanding of the status quo is accurate, the
primary customers using large gage springs frequently release requests for quotes to
reduce component costs. By being able to produce the springs cheaper, you might be
able to capture a larger segment of the business, however competitors might also be able
to reduce your market share. They have provided the probabilities below. Should this
project be accepted or rejected under the new criteria?
Loss of Market Share
Maintain Market Share
Capture New Project A
Capture New Project B
Capture New Project A & B
2. Five years ago, a conveyor system was installed in a manufacturing plant at a cost of $35,000.
I was estimated that the system, which still in operating condition, would have a useful life of
eight years, with a salvage value of $3,000. If the firm continues to operate the
system, the system’s estimated market values and operating costs for the next three years are as
End of Year Market Value
A new system can be installed for $43,500. This system would have an estimated economic life
of 10 years, with a salvage value of $3,500. The operating costs for the new system are expected
to be $1,500 per year throughout its service life. The firm’s MARR is 15%. Ignore any income
tax effects for this problem.
a. What is the remaining economic service life of the old machine?
b. When should the defender be replaced?
3. As Boeing and other aircraft manufacturers are planning to use more aluminum lithium alloys
for their future aircrafts, the American Aluminum Company is considering making a major
investment of $150 million ($5 million for land, $45 million for buildings, and $100 million for
manufacturing equipment and facilities) to develop a stronger lighter material called aluminum
lithium that will make aircraft studier and more fuel-efficient. Aluminum lithium, which has been
sold commercially for only a few years as an alternative to composite materials, will likely be the
material of choice for the next generation of commercial and military aircraft because it is so
much lighter than conventional aluminum allows, which use a combination of copper, nickel, and
magnesium to harden aluminum.
The firm predicts that aluminum lithium will account for about 5% of structural weight of the
average aircraft within 5 years and 10% in 10 years. The proposed plant would have a service
life of 12 years, would have a capacity of about 10 million pounds of aluminum lithium,
although domestic consumption of the material is expect to be only 3 million pounds during the
first four years, 5 million for the next three years, and 8 million for the remaining life of the
plant. Aluminum lithium costs $12 per pound to produce and is expected to sell at $17 per
pound. The building will be depreciated according to the 39 year MACRS real property class
and manufacturing and facilities classified as seven year MACRS. At the end of the project life
the land will be worth $8 million, the buildings $30 million, and equipment $10 million.
Assuming that the firm’s marginal tax rate is 40% and its capital gains tax rate is 40%, develop
cash flow and income statements for this project.
a. Develop Income and Cash Flow Statements for this proposed project.
b. What is the Internal Rate of Return (IRR)?
c. This firm demands an inflation free interest rate of 10% on projects. Based on current
inflation trends, should this project be accepted or rejected?
4. Sunbelt Rentals is in the business of leasing a variety of heavy equipment to construction
companies. The firm wants to develop a daily rental rate for a manlift that is expected to be
operated for three years. The piece of equipment costs $41,000 and will require
$1,750 in maintenance every year. The lessee will be responsible for all other operating
expenses. The asset is classified as a five-year MACRS property and the expected salvage value
at the end of the 3 years is $11,000. Sunbelt’s marginal tax rate is 35% and requires an after-tax
return of 10%. History has shown that equipment such as this has a 60% daily utilization (under
a. What should the daily rental rate be set at?
b. Does it make sense to give discounted rates for weekly and monthly rentals? And if
so, how much of a discount should be allowed?
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