Georgia Ceramic Company has an automatic glaze sprayer that has been used for the past 10 years. The sprayer can be used for another 10 years and will have a zero salvage value at that time. The annual operating and maintenance costs for the sprayer amount to $15,000 per year. Due to an increase in business, a new sprayer must be purchased, either in addition to or as a replacement for the old sprayer. Option 1: H the old sprayer is retained, a new, smaller capacity sprayer willbe purchased at a cost of $48,000; this new sprayer will have a $5.000 salvage value in I 0 years and annual operating and maintenance costs of $12.000. The old sprayer has a current market value of $6.000.Option 2: If the old sprayer is sold, a new sprayer of larger capacity will bepurchased for $84,000. This sprayer will have a $9,000 salvage value in 10years and annual operating and maintenance costs of $24,000.Which option should be selected at MARR = 12%?

Georgia Ceramic Company has an automatic glaze sprayer that has been used for the past 10 years. The sprayer can be used for another 10 years and will have a zero salvage value at that time. The annual operating and maintenance costs for the sprayer amount to $15,000 per year. Due to an increase in business, a new sprayer must be purchased, either in addition to or as a replacement for the old sprayer. Option 1: H the old sprayer is retained, a new, smaller capacity sprayer willbe purchased at a cost of $48,000; this new sprayer will have a $5.000 salvage value in I 0 years and annual operating and maintenance costs of $12.000. The old sprayer has a current market value of $6.000.Option 2: If the old sprayer is sold, a new sprayer of larger capacity will bepurchased for $84,000. This sprayer will have a $9,000 salvage value in 10years and annual operating and maintenance costs of $24,000.Which option should be selected at MARR = 12%?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 9P

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Georgia Ceramic Company has an automatic glaze sprayer that has been used for the past 10 years. The sprayer can be used for another 10 years and will have a zero salvage value at that time. The annual operating and maintenance costs for the sprayer amount to $15,000 per year. Due to an increase in business, a new sprayer must be purchased, either in addition to or as a replacement for the old sprayer.• Option 1: If the old sprayer is retained, a new, smaller capacity sprayer will be purchased at a cost of $48,000; this new sprayer will have a $5.000 salvage value in 10 years and annual operating and maintenance costs of $12,000. The old sprayer has a current market value of $6.000.• Option 2: If the old sprayer is sold, a new sprayer of larger capacity will be purchased for $84,000. This sprayer will have a $9,000 salvage value in 10 years and annual operating and maintenance costs of $24,000.Which option should be selected at MARR = 12%?
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The Georgia Ceramic Company has anautomatic glaze sprayer that has been used for thepast 10 years. The sprayer can be used for another10 years and will have a zero salvage value at thattime. The annual operating and maintenance costsfor the sprayer amount to $15,000 per year. Due toan increase in business, a new sprayer must be purchased. Georgia Ceramic is faced with two options.• Option 1: If the old sprayer is retained, a newsmaller capacity sprayer will be purchased at a costof $48,000, and it will have a $5,000 salvage valuein 10 years. This new sprayer will have annualoperating and maintenance costs of $12,000. Theold sprayer has a current market value of $6,000.• Option 2: If the old sprayer is sold, a newsprayer of larger capacity will be purchased for$84,000. This sprayer will have a $9,000 salvagevalue in 10 years and will have annual operatingand maintenance costs of $24,000.Which option should be selected at MARR = 15%?
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National Chemicals has an automatic chemical mixer that it has been using for the past 4 years. The mixer originally cost $18,000. Today the mixer can be sold for $10,000. The mixer can be used for 10 years more and will have a $2,500 salvage value at that time. The annual operating and maintenance costs for the mixer equal $6,000/year. Because of an increase in business, a new mixer must be purchased. If the old mixer is retained, a new mixer will be purchased at a cost of $25,000 and have a $4,000 salvage value in 10 years. This new mixer will have annual operating and maintenance costs equal to $5,000/year. The old mixer can be sold and a new mixer of larger capacity purchased for $32,000. This mixer will have a $6,000 salvage value in 10 years and will have annual operating and maintenance costs equal to $8,000/year. Based on a MARR of 15% and using an EUAC cash flow approach, what do you recommend?
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Commercial Hydronics is considering replacing one of its larger control devices. A new unit sells for $32,000 (delivered). An additional $4,000 will be needed to install the device. The new device has an estimated 18-year service life. The estimated salvage value at the end of 18 years will be $2,000. The new control device will be depreciated as a 7-year MACRS asset. The existing control device (original cost = $15,000) has been in use for 9 years, and it has been fully depreciated (that is, its book value equals zero). Its scrap value is estimated to be $2,500. The existing device could be used indefinitely, assuming the firm is willing to pay for its very high maintenance costs. The firm's marginal tax rate is 40 percent. The new control device requires lower maintenance costs and frees up personnel who normally would have to monitor the system. Estimated annual cash savings from the new device will be $5,000. The firm's cost of capital is 10 percent. What is the NPV?
Ayayai’s Lawn Service needs to purchase a new lawnmower costing $7,756 to replace an old lawnmower that cannot be required. The new lawnmower is expected to have a useful life of 4 years, with no salvage value at the end of that period. Appendix 9.1 – Period 4 at 10%Present value of $1 received in n periods= 0.6830 Appendix 9.2- Period 4 at 14% Present value of an annuity of $1 per period = 2.9137 If Ayayai’s required rate of return 10%, what level of annual cash savings must the lawnmower generate to be considered an acceptable investment under the net present value method? Annual Cash Savings should be $ If Ayayai’s required rate of return 14%, what level of annual cash savings must the lawnmower generate to be considered an acceptable investment under the net present value method? Annual cash savings should be?
The Cornchopper Company is considering the purchase of a new harvester. • The new harvester is not expected to affect revenue, but operating expenses will be reduced by $13,600 per year for 10 years. • The old harvester is now 5 years old, with 10 years of its scheduled life remaining. It was originally purchased for $74,000 and has been depreciated by the straight- line method. • The old harvester can be sold for $21,600 today. • The new harvester will be depreciated by the straight-line method over its 10-year life. • The corporate tax rate is 21 percent. . The firm's required rate of return is 15 percent. • The initial investment, the proceeds from selling the old harvester, and any resulting tax effects occur immediately. • All other cash flows occur at year-end. . The market value of each harvester at the end of its economic life is zero.
Cisco Systems is purchasing a new bar code - scanning device for its service center in San Francisco. The table on the right lists the relevant initial costs for this purchase. The service life of the system is 4 years and its salvage value for depreciation purposes is expected to be about 23% of the hardware cost. a. What is the cost basis of the device? b. What are the annual depreciations of the device if (i) the SL method is used? (ii) the 150% DB method is used? (iii) the 200% DB method is used? c. Calculate the book values of the device at the end of 4 years using all the methods above. Answers: (Round to the nearest dollar) (a) The cost basis of the device is $ (b) Annual depreciaitions and book values: (Round to the nearest dollar) Year 1 2 3 4 Book values at end of year 4 SL 69 69 69 69 69 150% DB 69 $ $ 200% DB 69 69 69 12 Cost Item Hardware Training Installation Cost $160,000 $16,000 $17,000