# 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. CF 0 = -\$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 C0 3 = \$244,940 + [\$60,000 (1 - .34)] + \$23,000 = \$307,540 Difficulty level: Challenge Topic: COST-CUTTING Type: PROBLEMS

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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.) Machine B lowers the annual cost of the equipment by about \$11,600, = (\$132,912 - \$121,312). Difficulty level: Challenge Topic: EQUIVALENT ANNUAL COST Type: PROBLEMS

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Chapter 06 - Making Capital Investment Decisions 6-38
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