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

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Definitions:

Operating Departments

Operating departments are units within an organization directly involved in its primary revenue-generating activities, such as production or sales departments.

Maintenance Department

A division within a company responsible for maintaining equipment, facilities, and systems to ensure efficient and safe operations.

Variable Costs

Costs that change in proportion to the level of production or business activity, such as raw materials and direct labor.

Fixed Costs

Expenses that do not fluctuate with the level of production or sales, such as rent, salaries, and insurance premiums.