Bull Gator Industries Is Considering a New Assembly Line Costing

question 10

Essay

Bull Gator Industries is considering a new assembly line costing $6,000,000. The assembly line will be fully depreciated by the simplified straight line method over its 5 year depreciable life. Operating costs of the new machine are expected to be $1,100,000 per year. The existing assembly line has 5 years remaining before it will be fully depreciated and has a book value of $3,000,000. If sold today the company would receive $2,400,000 for the existing machine. Annual operating costs on the existing machine are $2,100,000 per year. Bull Gator is in the 46 percent marginal tax bracket and has a required rate of return of 12 percent.
a. Calculate the net present value of replacing the existing machine.
b. Explain the impact on NPV of the following:
i. Required rate of return increases
ii. Operating costs of new machine are increased
iii. Existing machine sold for less

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Definitions:

Prediction Interval

An interval estimate of a real-valued observation based on a sample of data predicting where an individual measurement will fall.

Particular Value

A specific or distinct value within a set or range of data.

Simple Linear Regression

A statistical method for modeling the relationship between a single independent variable and a single dependent variable, assuming a linear relationship.

Residuals

The differences between observed values and the values predicted by a statistical model, indicating the model's accuracy.