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:

Investment Center

A business unit or department that is responsible for its own revenues, expenses, and investment in assets, with its performance measured by its return on investment.

Controllable Margin

The portion of profit or income directly influenced by the management decisions, typically excluding fixed costs.

Required Return

The minimum expected return by investors for providing capital, based on the risk of the investment.

Operating Assets

Assets used in the daily operations of a business to generate revenue, such as machinery, building, and equipment.