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The Publishing Company is considering the replacem...




The Publishing Company is considering the replacement of some equipment used to produce textbooks. The existing equipment is fully depreciated and has a salvage value of zero. The existing equipment is fully operational and could be operated for the next five years, but its maximum capacity is 460 books per day. For the year that has just ended, the company used this existing equipment in the production and sale of 100,000 textbooks for the year. The production facility operates 250 days per year, and there are no plans to increase the number of days worked per year. The invoice price of the new equipment is $3.75 million; shipping and installation would cost an additional $200,000. The new equipment would have a five-year life, and it would be depreciated over a five-year MACRS recovery period. It is expected to have a salvage value of $50,000 five years from today. The new equipment would have the capacity to produce 650 books per day, and it would be expected to lower variable operating expenses from 42% to 38% of dollar sales. Fixed operating costs would be expected to remain at $125,000 in the first year of the project. The Company forecasts 10% annual growth in textbook sales for the next five years. The average price per book sold last year was $100. The expected inflation rate for all prices and costs is expected to be 3% per year. No changes in net operating working capital are expected. Assume the Company has a 40% marginal tax rate. Estimate the cash flows after tax over the five-year life of the project. If the project cost of capital is 12%, what is the project NPV? Year MACRS Factors 5-Year Recovery Period 1 0.2000 2 0.3200 3 0.1920 4 0.1152 5 0.1152 6 0.0576


Paper#8485 | Written in 18-Jul-2015

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