Silver Bakers, Inc. (SBI) has an opportunity to invest in a new bread-making machine. SBI needs...

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Silver Bakers, Inc. (SBI) has an opportunity to invest in a newbread-making machine. SBI needs more productive capacity, so thenew machine will not replace an existing machine. The new machineis priced at $250,000 and will require modifications costing$13,000. It has an expected useful life of 10 years, will bedepreciated using the MACRS method over its 5-year class life, andhas an expected salvage value of $12,500 at the end of Year 10.(See Table 10A.2 for MACRS recovery allowance percentages.) Themachine will require a $23,000 investment in net working capital.It is expected to generate additional sales revenues of $125,000per year, but its use also will increase annual cash operatingexpenses by $55,000. SBI’s required rate of return is 10 percent,and its marginal tax rate is 40 percent. The machine’s book valueat the end of Year 10 will be $0, so SBI will have to pay taxes onthe $12,500 salvage value.
a. What is the NPV of this expansion project? Should SBIpurchase the new machine?
b. Suppose SBI’s required rate of return is 12 percent ratherthan 10 percent. Should the new machine be purchased in thiscase?
c. Should SBI purchase the new machine if it is expected to beused for only five years and then sold for $31,250? (Note that themodel is set up to handle a five-year life; you need enter only thenew life and salvage value.)
d. Would the machine be profitable if revenues increased by only$105,000 per year? Assume everything else is as originallypresented and evaluated in part a.
e. Suppose that revenues rose by $125,000 but expenses rose by$65,000. Would the machine be acceptable under these conditions?Assume a 10-year project life and a salvage value of $12,500.

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4.4 Ratings (949 Votes)

aThe cash flows and NPV of the project are calculated as belowNet cash flow in year 0 initial investment in equipment increase in working capitalNet cash flow in year s 1 to 9 Income after taxes See Answer

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Silver Bakers, Inc. (SBI) has an opportunity to invest in a newbread-making machine. SBI needs more productive capacity, so thenew machine will not replace an existing machine. The new machineis priced at $250,000 and will require modifications costing$13,000. It has an expected useful life of 10 years, will bedepreciated using the MACRS method over its 5-year class life, andhas an expected salvage value of $12,500 at the end of Year 10.(See Table 10A.2 for MACRS recovery allowance percentages.) Themachine will require a $23,000 investment in net working capital.It is expected to generate additional sales revenues of $125,000per year, but its use also will increase annual cash operatingexpenses by $55,000. SBI’s required rate of return is 10 percent,and its marginal tax rate is 40 percent. The machine’s book valueat the end of Year 10 will be $0, so SBI will have to pay taxes onthe $12,500 salvage value.a. What is the NPV of this expansion project? Should SBIpurchase the new machine?b. Suppose SBI’s required rate of return is 12 percent ratherthan 10 percent. Should the new machine be purchased in thiscase?c. Should SBI purchase the new machine if it is expected to beused for only five years and then sold for $31,250? (Note that themodel is set up to handle a five-year life; you need enter only thenew life and salvage value.)d. Would the machine be profitable if revenues increased by only$105,000 per year? Assume everything else is as originallypresented and evaluated in part a.e. Suppose that revenues rose by $125,000 but expenses rose by$65,000. Would the machine be acceptable under these conditions?Assume a 10-year project life and a salvage value of $12,500.