Bull Gator Industries Is Considering a New Assembly Line Costing

question 28

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 five-year depreciable life.Operating costs of the new machine are expected to be $1,100,000 per year.The existing assembly line has five 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% marginal tax bracket and has a required rate of return of 12%.
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

---

Definitions:

Producers

Organisms, typically plants and algae, that produce organic compounds from simple substances like carbon dioxide, essentially supporting most food chains.

Consumers

Organisms that obtain their energy and nutrients by eating other organisms, cannot produce food themselves and are part of the food chain.

Ecosystem

A biological community interacting with its environment.

Energy Flow

The passage of energy through the components of an ecosystem, from the sun through producers to consumers and then to decomposers.