An automobile manufacturer is considering the installation of a high-tech material handling system for $30,000,000. This systemwill save $7,500,000 per year in manual labor, and it will incur $2,750,000 in annual operating and maintenance expenditures. Thesalvage value at the end of the system's 10-year life is negligible. If the company's hurdle rate (MARR) is 10% per year, what is theIRR (internal rate of return) of this project?(A) 8.33%B 12.18%10.53%D) 9.37%

IRR is internal rate of return is the discount rate at which present value of savings from equipment…

Answered: An automobile manufacturer is consid…

An automobile manufacturer is consid will save $7,500,000 per year in manua salvage value at the end of the system IRR (internal rate of return) of this proj A) 8.33% B) 12.18% (C) 10.53% D) 9.37%

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 21BEA

See similar textbooks

Related questions

Q: When deciding whether or not to take a trade discount, the cost of borrowing funds should be…

A: Trade Discount - It is the discount which is given on bulk purchase, the same is reduced from the…

Q: The following table lists several corporate bonds issued during a particular quarter. Company AT&T…

A: Please note that it assumed the bond is a zero coupon bond. Price of the bond is amount that is…

Q: 7) EmKay, Inc. is considering an investment in a new production equipment to boost its revenue. For…

A: A loan is a contract between two parties where one receives an amount of money from another in…

Q: Your rich aunt has promised to give your $4600 in 5 years. How much should you be willing to…

A: EXCEL FORMULA:

Q: Long-term financing may be riskier than short-term financing during periods of tight credit because…

A: Long term financing refers to financing in which the maturity of the debt or the loan or the…

Q: Made sure you differentiate portfolio investments from FDI. Can we argue that a "A closed economy,…

A: FDI and Portfolio investment - FDI or Foreign Direct Investment involves a large commitment of…

Q: What is the financial function? How is it important in the engineering firm?

A: Finance: Finance is study of money and investments. In broader concept, it deals with all the…

Q: Explain why we de-lever and re-lever the ³₁.

A: Beta Beta is a measure of systematic risk. It measures the volatility of a portfolio or a security…

Q: You plan to place $1,200 per year into a Roth IRA. You expect to earn 6% APR and you will place this…

A: Given, The yearly deposit is $1,200 Rate is 6% Term of investment is 35

Q: While Kate was a student at SA University, she borrowed $16,000 in student loan at an annual…

A: The concept of the present value implies that the money today is having more worth than the money…

Q: Find the future value, using the future value formula and a calculator. (Round your answer to the…

A: Future value is the value of present investment in future after considering the rate of interest.…

Q: The down payment or equity needed for this investment is $60,000 (outflow) Cash Flow $15,000 5,000…

A: MIRR: By assuming that profits are reinvested at the company's cost of capital and that cash…

Q: A family has a $137,210, 30-year mortgage at 5.4% compounded monthly. Find the monthly payment. Also…

A: Here, To Find: Monthly Payment =? Unpaid balance at 10, 20, and 25 years' time =?

Q: ments. The first replacement payment is due in three years and the second payment is due in termine…

A: The effective interest is the interest after considering the impact of compounding on interest and…

Q: Marissa borrowed $1,010 today and is to repay the loan in two equal payments, one in 3 months and…

A: A loan is an agreement between two parties where one party gets a set amount from the other party in…

Q: After four challenging yet fruitful years, you just graduated from college. Your parents gave you…

A: Future Value: The future value is the value of annuity or the sum lump amount after a certain period…

Q: Using the SML [LO4] Asset W has an expected return of 11.8 percent and a beta of 1.15. If the…

Q: Estimating Share Value Using the DCF Model Following are forecasts of Home Depot’s sales, net…

A: Value per share refers to the ratio computed by dividing the common shareholders by the number of…

Q: Now let’s pretend that we buy an annuity at the age of 70 with how much money we have in total from…

A: Annuities are regular stream of cash flows as payments which occur for a defined period and at a…

Q: Which of the following involves a financial outflow from the U.S. economy? a. returns paid on U.S.…

A: In the economy there are outflows and inflows to economy because investors may invest outside and…

Q: Suresh, a recently retired teacher, has requested you to help him select one from the following two…

A: Net present value (NPV) NPV is a capital budgeting tool to decide whether the investment is…

Q: Identify the main differences between common stock and preferred stock.

A: Preferred stock are hybrid type of security between the equity and bonds and they have features of…

Q: Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000…

A: Bonds are debt instruments issued by a company. The company that issues the bond pays a periodic…

Q: g Nike's stock price is $68 per share, shares outstanding are $1,600 million, and the company…

A: Company need money and they can raise from the market by issue of new shares but how many shares to…

Q: There are two firms: Firm U and Firm L. Both firms have $100M total assets and $15M EBIT (eamings…

A: Return on Equity can be calculated as follows. Return on Equity = (Profit available for equity /…

Q: What are the advantages and disadvantages of a ‘comply or explain’ model of corporate governance?

A: "Comply or explain" model of corporate governance - The purpose of 'comply or explain' model is to…

Q: Find the amount of a perodic payment necessary fur the deposit of a sinking fund. Amount needed…

A: A sinking fund is created for repayment of debt.A fixed sum of money is set aside periodically…

Q: d. Your savings account is going up and up exponentially (ish) be three different…

A: As per you instruction only D and E will be solved.To recap, you have a savings goal of $20,317 at…

Q: 1. Murdoch Pty Ltd is considering three mutually exclusive projects. The initial cash outflow and…

A: Here,

Q: PMT r t Payment interval Compounding period FV PV

A: Present Value: It represents the present amount of a future value of an investment. It is…

Q: If Rita receives $36.44 interest for a deposit earning 6% simple interest for 10 days, what is the…

A: To calculate the deposit amount we will use the below formula Deposit amount = I/(r*d/365) Where I…

Q: Suppose health-care reform Y makes it unlawful for insurance companies to deny insurance to persons…

A: In finance when health care related policies are implemented then a cost benefit analysis is done by…

Q: How does eps affect the stock market

A: The earning per share of the company will be reflective of the total earnings made for each of the…

Q: What is the net present value of this project?

A: Information Provided: Fixed cost = $157,000 Annual sales = $98,000 Variable cost = $27,400 Fixed…

Q: 3) Finance how do I find and compute the equity value of LOW (Lowes) stock?

A: Lowe's is an American retail company. It specializes in home improvement.

Q: Suppose the market premium is 12%, market volatility is 20% and the risk-free rate is 6%. Suppose a…

A: Market risk premium (Mp) = 0.12 or 12% Risk free rate (Rf) = 0.06 or 6% Beta (b) = 0.8 Expected…

Q: Derek plans to retire on his 65th birthday. However, he plans to work part-time until he turns…

A: We will use the concept of time value of money here. As per the concept of time value of money the…

Q: At a used car sales lot, a person has $2 000 for a down payment and can afford $150 per week. The…

A: We will use the concept of time value of money here. As per the concept of time value of money the…

Q: explain the effect of additional debt on the weighted average cost of capital (WACC)?

A: When the company takes on additional date in its capital structure then it increases the risk of…

Q: Finance Which one of the following statements is not correct? a) Market timing theory argues that…

A: The wrong statement is b) According to static trade-off theory agency costs of equity increase when…

Q: What are the three 'C's' of mortgage underwriting? What is one way in which each of the 'C's' is…

A: When you buy house than you need loan for home but there is need of down payment also and remaining…

Q: Say you purchase a computer for $1300 at 7% interest and want to have it paid off in 48 months. Use…

A: A loan is an agreement between two parties in which one party gives money to the other party in…

Q: The Everly Equipment Company’s flange-lipping machine was purchased 5 years ago for $55,000. It had…

A: Net present value refers to the value of an asset present today based on the future stream of…

Q: The owner of oak hill farm deposits $3000 at the end of each quarter into an account paying 2.5…

A: To calculate the value at the end of 5 years and 6 months we will use the below formula Future…

Q: A new homeowner, Ms. Dee Young, needs to decide whether to install R-11 or R-19 insulation in the…

A: Future worth of any cost would be the initial cost and interest being accumulated over the period of…

Q: Professor Sandra Laneway received a payment of $500,000 from her grandmother’s estate on what is…

A: Prof. Sandra will receives $7000 per month for 20 years during retirement. Let us determine the…

Q: Five years ago you borrowed $200,000 to finance the purchase of a $240,000 house. The interest rate…

A: Hi There, thanks for posting the question. But as per Q&A guidelines, we must answer the first…

Q: On July 30, 2021, the following information was available to an investor: Yield on 10 Year TIPS:…

A: TIPS are treasury inflation-protected securities. These securities are indexed to inflation and…

Q: Which of the following statement(s) are true? a By adding more stocks to my portfolio, I can…

A: One of the most popular ways to determine a risk-adjusted return is through the use of the Sharpe…

Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

An automobile manufacturer is considering the installation of a high-tech material handling system for $30,000,000. This system
will save $7,500,000 per year in manual labor, and it will incur $2,750,000 in annual operating and maintenance expenditures. The
salvage value at the end of the system's 10-year life is negligible. If the company's hurdle rate (MARR) is 10% per year, what is the
IRR (internal rate of return) of this project?
(A) 8.33%
B 12.18%
10.53%
D) 9.37%

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of $25 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company’s cost of capital is 12%. By how much would the value of the company increase if it accepted the better project (plane)? What is the equivalent annual annuity for each plane?
large automobile manufacturer is considering the installation of a high-tech material handling system for $30,000,000. This system will save $7,500,000 per year in manual labor, and it will incur $2,750,000 in annual operating and maintenance expenditures. The salvage value at the end of the system's 10-year life is negligible. If the company's hurdle rate (MARR) is 10% per year. How can I find the Internal Rate of Return
A large automobile manufacturer is considering the installation of a high-techmaterial handling system for $30,000,000. This system will save $7,500,000 per year in manual labor, and it will incur $2,750,000 in annual operating andmaintenance expenditures. The salvage value at the end of the system’s 10-year life is negligible. If the company’s hurdle rate (MARR) is 10% per year, should the system be recommended for implementation?
A large automobile manufacturer is considering the installation of a high-tech material handling system for $30,000,000. This system will save $7,500,000 per year in manual labor, and it will incur $2,750,000 in annual operating and maintenance expenditures. The salvage value at the end of the system's 10-year life is negligible. If the company's hurdle rate (MARR) is 10% per year, should the system be recommended for implementation? The breakeven interest rate is %. (Round to two decimal places.) Should the system be recommended for implementation? Choose the correct answer below. A. No, this material handling system should not be recommended. B. Yes, this material handling system should be recommended.
A new electronic process monitor costs $990,000. This cost could be depreciated at 30% per year (Class 10). The monitor would actually be worth $100,000 in five years. The new monitor would save $460,000 per year before taxes and operating costs. Suppose the new monitor requires us to increase net working capital by $47,200 when we buy it. If we require a 15% return, what is the NPV of the purchase? Assume a tax rate of 40%. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV $194719.60
A new electronic process monitor costs $990,000. This cost could be depreciated at 30% per year (Class 10). The monitor would actually be worth $100,000 in five years. The new monitor would save $460,000 per year before taxes and operating costs. Suppose the new monitor requires us to increase net working capital by $47,200 when we buy it. If we require a 15% return, what is the NPV of the purchase? Assume a tax rate of 40%. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV $ 94186.67 x
The Geo-Star Manufacturing Company is considering a new investment in a punch-press machinethat will cost $100,000 and has an annual maintenance cost of $10,000. There is also an additionaloverhauling cost of $20,000 for the equipment onceevery four years. Assuming that this equipment willlast infinitely under these conditions, what is thecapitalized equivalent cost of this investment at aninterest rate of 10%?
A company is considering expanding their production capabilities with a new machine that costs $114,000 and has a projected lifespan of 10 years. They estimate the increased production will provide a constant $12,000 per year of additional income. Money can earn 1.6% per year, compounded continuously. Should the company buy the machine? No, the present value of the machine is less than the cost by $ over the life of the machine