A US Manufacturer of Particle Board Furniture Is Considering Investing in in a New

question 143

Essay

A U.S. manufacturer of particle board furniture is considering investing in a new stamping machine. The machine is expected to have a useful life of five years, after which the machine can be sold as scrap for an estimated $5000. The firm plans to issue bonds to pay for the machine and intends to treat the interest rate on the bonds as the relevant discount rate for evaluating the project. The machine will cost the firm $175,000, all of which must be paid at the beginning of the project. The new stamping machine will reduce costs $50,000 per year, for each year of the machine's life. The firm treats all of the cost savings as if they occur at year end. Should the firm plan to undertake the investment project, bonds will be issued in approximately three months. The firm has estimated the supply and demand for loanable funds given by these equations:
L_D = 25,000,000 - 125,000,000 R
L_S = 2,500,000 + 62,500,000 R
a. Given the information above, should the firm undertake the investment in the stamping machine? Support your answer using numbers.
b. Assume that the demand for loanable funds shifts the demand curve upward by 3,750,000 (i.e., 3,750,000 more demand at every interest rate). What impact will the increase in demand have on the interest rate and on the firm's stamping machine project? (Assume that the firm learns of this change in demand before accepting the project.)

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Definitions:

Bank Service Charges

Fees charged by a bank for the maintenance of an account and for providing various banking services.

NSF Checks

Non-sufficient funds checks are ones that cannot be processed because the drawer's account does not have enough money to cover the amount.

Journal Entry

A record in accounting that represents a transaction and its effects on accounts, following the double-entry system.

Days' Cash on Hand

A financial metric indicating the number of days a company can continue to operate using only its available cash, without additional income.