Gramling Inc. is considering an investment in new operating equipment with a 15-
ID: 2444078 • Letter: G
Question
Gramling Inc. is considering an investment in new operating equipment with a 15-year life. The new equipment will cost $300,000 and a one-time cost of $15,000 will be incurred to remove the old equipment and install the new equipment. The old equipment that will be replaced originally cost $200,000 and has a current book value of $25,000. This old equipment will be sold for $8,000. The new equipment will be depreciated uniformly over its useful life. At the end of 15 years, this equipment will be removed and given to the local recycling center. The new equipment is expected to generate cash profits of $83,000 per year. Gramling uses an 11 percent hurdle rate (its market rate of interest) to evaluate long-term projects and is subject to a 30 percent tax rate. Required:• A. Should Gramling invest in this equipment?
• B. Assuming that Gramling does invest in the equipment, which of the following financing options would be best, a 10-year noninterest-bearing note (annual compounding) or a 10-year monthly installment note?
Explanation / Answer
Discount
Discounted
Income after
Income after
Income
Years
Income
Rate 11%
Cash flows
Depreciation
Depreciation
Tax 30%
Tax& Depreciation
after tax
Discount
Discounted
Income after
Income after
Income
Years
Income
Rate 11%
Cash flows
Depreciation
Depreciation
Tax 30%
Tax& Depreciation
after tax
1 83000 =1/(1.11)^1 0.900900901 74774.77477 21000 53774.77477 16132.43243 37642.34234 58642.34234 2 83000 =1/(1.11)^2 0.811622433 67364.66196 21000 46364.66196 13909.39859 32455.26337 53455.26337 3 83000 =1/(1.11)^3 0.731191381 60688.88465 21000 39688.88465 11906.66539 27782.21925 48782.21925 4 83000 =1/(1.11)^4 0.658730974 54674.67085 21000 33674.67085 10102.40126 23572.2696 44572.2696 5 83000 =1/(1.11)^5 0.593451328 49256.46023 21000 28256.46023 8476.938069 19779.52216 40779.52216 6 83000 =1/(1.11)^6 0.534640836 44375.1894 21000 23375.1894 7012.556819 16362.63258 37362.63258 7 83000 =1/(1.11)^7 0.481658411 39977.6481 21000 18977.6481 5693.294431 13284.35367 34284.35367 8 83000 =1/(1.11)^8 0.433926496 36015.89919 21000 15015.89919 4504.769758 10511.12943 31511.12943 9 83000 =1/(1.11)^9 0.390924771 32446.75603 21000 11446.75603 3434.026809 8012.729221 29012.72922 10 83000 =1/(1.11)^10 0.352184479 29231.31174 21000 8231.311738 2469.393521 5761.918217 26761.91822 11 83000 =1/(1.11)^11 0.317283314 26334.51508 21000 5334.51508 1600.354524 3734.160556 24734.16056 12 83000 =1/(1.11)^12 0.285840824 23724.78836 21000 2724.78836 817.436508 1907.351852 22907.35185 13 83000 =1/(1.11)^13 0.257514256 21373.68321 21000 373.6832072 112.1049621 261.578245 21261.57825 14 83000 =1/(1.11)^14 0.231994825 19255.57046 21000 -1744.429543 -1744.429543 19255.57046 15 83000 =1/(1.11)^15 0.209004347 17347.36077 21000 -3652.639228 -3652.639228 17347.36077 = $510,670Related Questions
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