ADM 2350 Winter 2011 Assign 3 Solns

ADM 2350 Winter 2011 Assign 3 Solns - Winter 2011 ADM 2350...

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View Full Document Right Arrow Icon Winter 2011 ADM 2350 SECTIONS M, N, & P Prof. W. Rentz FINANCIAL MANAGEMENT Assignment #3 Solutions GENERAL INSTRUCTIONS: Your assignment must be sent electronically in either doc docx , or pdf format to the TUTOR for your section . Your tutor must RECEIVE your assignment by no later than noon on Thursday, March 24, 2011 . Late assignments will NOT be accepted. To ensure that your tutor receives the assignment on time, it is STRONGLY recommended that you electronically submit your assignment before midnight on the evening of Wednesday, March 23, 2011 at the latest. Unless there are system problems with doc-depot, the professors’ solution set will be posted on doc-depot by no later than 6 PM of the due date. 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 . However, 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 scanned statement of integrity must be electronically attached to each assignment (See pages 10-11 of the course syllabus). Each individual whose name appears on the assignment must sign the statement of integrity. Live Links for Tutors’ E-mail Addresses: Section M Yue Wan [email protected] Section N Sushil Dahiya [email protected] Section P Yuan Liu [email protected] Section Q Malcolm MacQuarrie [email protected] 1. (50 marks) Will’s Machine Shop Corporation purchased a computer controlled drill press 6 years ago that had an estimated economic life of 10 years. The drill press originally cost $400,000, was placed in class 10 with a CCA rate of 30 percent, and has a current undepreciated capital cost of $57,144. The actual market value of this drill press is $50,000. The firm is considering replacing the drill press with a new one costing $180,000. 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 4-year economic life. You should assume that class 10 will remain open as the firm has many assets in class 10. The net salvage value of the new machine in four years is estimated to be $40,000. If kept, the old machine has an estimated net salvage value of $10,000 in four years. The firm’s current marginal tax rate is 25 percent. The firm’s project cost of capital for this replacement decision is 10 percent. The firm’s initial incremental net working capital would increase by $12,000 as a result of replacing the drill press. Annual revenues during the project’s first year would increase from $300,000 to $400,000 if the new drill press were purchased. After the first year, revenues from the new project are expected to increase at a rate of $12,000 per year for the remainder of the project life to reach $436,000 in Year 4. The required incremental net working capital will be $1,000 at the end of each year for years 1 through 3.
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Winter 2011 Assignment #3 ADM 2350 2 The cumulative increase in incremental net working capital of $15,000, which equals the
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ADM 2350 Winter 2011 Assign 3 Solns - Winter 2011 ADM 2350...

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