Present Worth Analysis •Future Worth Analysis •Annual Equivalent Worth Analysis •Rate of Return A

1. Your company, Performance Machines produces a variety of specialized components for turbines and industrial power transmission systems, including large springs. While you have automatic machines capable of making spring less than 0.375” gage, anything larger currently must be made by hand. At a trade show you identified a machine that is capable of automating spring production for gages between 0.375” to 0.75”. The machine will cost $150,000 and will require another ($12,000 ) in commissioning costs. Using this automatic machine is expected to decrease costs by ($46,000 ) annually, is expected to last for 10 years, should be depreciated on a 7 year MACRS schedule, and will have a salvage value ($1,000.)

A-Your firm uses a MARR of 10% and has a marginal tax rate of 35%. Develop an income statement and cash flow statement for this machine. Should this project be accepted or rejected?

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B-When you were developing your proposal you spoke with the business capture team. They informed you that while your understanding of the status quo is accurate, the primary customers using large gage springs frequently release requests for quotes to reduce component costs. By being able to produce the springs cheaper, you might be able to capture a larger segment of the business, however competitors might also be able to reduce your market share. They have provided the probabilities below. Should this project be accepted or rejected under the new criteria?

2-As Boeing and other aircraft manufacturers are planning to use more aluminum lithium alloys for their future aircrafts, the American Aluminum Company is considering making a major investment of $150 million ($5 million for land, $45 million for buildings, and $100 million for manufacturing equipment and facilities) to develop a stronger lighter material called aluminum lithium that will make aircraft studier and more fuel-efficient. Aluminum lithium, which has been sold commercially for only a few years as an alternative to composite materials, will likely be the material of choice for the next generation of commercial and military aircraft because it is so much lighter than conventional aluminum allows, which use a combination of copper, nickel, and magnesium to harden aluminum.

The firm predicts that aluminum lithium will account for about 5% of structural weight of the average aircraft within 5 years and 10% in 10 years. The proposed plant would have a service life of 12 years, would have a capacity of about 10 million pounds of aluminum lithium, although domestic consumption of the material is expect to be only 3 million pounds during the first four years, 5 million for the next three years, and 8 million for the remaining life of the plant. Aluminum lithium costs $12 per pound to produce and is expected to sell at $17 per pound. The building will be depreciated according to the 39 year MACRS real property class and manufacturing and facilities classified as seven year MACRS. At the end of the project life the land will be worth $8 million, the buildings $30 million, and equipment $10 million. Assuming that the firm’s marginal tax rate is 40% and its capital gains tax rate is 40%, develop cash flow and income statements for this project.

A-Develop Income and Cash Flow Statements for this proposed project.

B-What is the Internal Rate of Return (IRR)?

C-This firm demands an inflation free interest rate of 10% on projects. Based on current inflation trends, should this project be accepted or rejected?

3-Sunbelt Rentals is in the business of leasing a variety of heavy equipment to construction companies. The firm wants to develop a daily rental rate for a manlift that is expected to be operated for three years. The piece of equipment costs $41,000 and will require $1,750 in maintenance every year. The lessee will be responsible for all other operating expenses. The asset is classified as a five-year MACRS property and the expected salvage value at the end of the 3 years is $11,000. Sunbelt’s marginal tax rate is 35% and requires an after-tax return of 10%. History has shown that equipment such as this has a 60% daily utilization (under lease) rate.

A-What should the daily rental rate be set at?

B-Does it make sense to give discounted rates for weekly and monthly rentals? And if so, how much of a discount should be allowed?


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