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ADM 2350 Fall 2007 Assign 3 Solns

ADM 2350 Fall 2007 Assign 3 Solns - ADM 2350 SECTIONS A B C...

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ADM 2350 SECTIONS A, B, & C FINANCIAL MANAGEMENT Fall 2007 Assignment #3 Revised Solutions GENERAL INSTRUCTIONS: This assignment is due at the beginning of the lab on Wednesday, November 14, 2007 for Section C and Friday, November 16, 2007 for Sections A & B. It is your responsibility to hand in your assignment directly to the tutor for lab associated with the section in which you are registered. Please do not hand in your assignment in the wrong lab or to the professor. This assignment counts 5% of your course grade. You are encouraged to work on this assignment in teams of up to 5 students from the same section of this course. Nevertheless , you may turn in an individual assignment if you prefer. Each assignment must be typed and contain the student name(s) and student number(s) on each page. A statement of integrity must be attached to each assignment. Each individual whose name appears on the assignment must sign the statement of integrity. See p. 8 of the course syllabus for the integrity statement. 1. Sam’s Machine Shop purchased an automated drill press 5 years ago that had an estimated economic life of 14 years. The drill press originally cost $200,000, was placed in class 10 with a CCA rate of 30 percent, and has a current undepreciated capital cost of $40,817. The actual market value of this drill press is $60,000. The firm is considering replacing the drill press with a new one costing $140,000. Shipping and installation charges will add an additional $20,000 to the cost. The new machine will also be placed in class 10. The new machine is expected to have a 9-year economic life. The net salvage value of the new machine in nine years is estimated to be $30,000. If kept, the old machine has an estimated net salvage value of $10,000 in nine years. The firm’s current marginal tax rate is 40 percent. The firm’s project cost of capital for this replacement decision is 20 percent. The firm’s initial incremental net working capital would increase by $2,000 as a result of replacing the drill press. Annual revenues during the project’s first year would increase from $80,000 to $100,000 if the new drill press were purchased. After the first year, revenues from the new project are expected to
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