Thornley Machines is considering a 3 year project with an initial cost of

# Thornley machines is considering a 3 year project

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68. Thornley Machines is considering a 3-year project with an initial cost of \$618,000. The project will not directly produce any sales but will reduce operating costs by \$265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated \$60,000. The tax rate is 34%. The project will require \$23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a 9% rate of return? Why or why not? A. No; The NPV is -\$2,646.00. B.Yes; The NPV is \$27,354.00. C. Yes; The NPV is \$32,593.78. D. Yes; The NPV is \$43,106.54. E. Yes; The NPV is \$196,884.40. CF0= -\$618,000 + (-\$23,000) = -\$641,000 Annual depreciation = \$618,000 3 = \$206,000 Taxes = (\$265,000 - \$206,000) .34 = \$20,060 OCF = \$265,000 - \$20,060 = \$244,940 C03= \$244,940 + [\$60,000 (1 - .34)] + \$23,000 = \$307,540 Difficulty level: Challenge Topic: COST-CUTTING Type: PROBLEMS
Chapter 06 - Making Capital Investment Decisions 6-36 69. Tool Makers, Inc. uses tool and die machines to produce equipment for other firms. The initial cost of one customized tool and die machine is \$850,000. This machine costs \$10,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 9%? (Round your answer to whole dollars.) Difficulty level: Challenge Topic: EQUIVALENT ANNUAL COST Type: PROBLEMS 70. Jackson & Sons uses packing machines to prepare its products for shipping. One machine costs \$136,000 and lasts about 4 years before it needs replaced. The operating cost per machine is \$6,000 a year. What is the equivalent annual cost of one packing machine if the required rate of return is 12%? (Round your answer to whole dollars.) Difficulty level: Challenge Topic: EQUIVALENT ANNUAL COST Type: PROBLEMS
Chapter 06 - Making Capital Investment Decisions 6-37 71. Bruno's, Inc. is analyzing two machines to determine which one it should purchase. The company requires a 14% rate of return and uses straight-line depreciation to a zero book value. Machine A has a cost of \$290,000, annual operating costs of \$8,000, and a 3-year life. Machine B costs \$180,000, has annual operating costs of \$12,000, and has a 2-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Bruno's purchase and why? (Round your answer to whole dollars.) Difficulty level: Challenge Topic: EQUIVALENT ANNUAL COST Type: PROBLEMS
Chapter 06 - Making Capital Investment Decisions 6-38

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