Purchase Solution

Replacement Decisions - Tennergy Corporation

Not what you're looking for?

Ask Custom Question

Tennergy Corp is considering an investment in a new machine with a price of $40 million to replace its existing machine. The current machine was purchased one year ago at $10 million and depreciated on a straight line basis to zero salvage value over five-year useful life. It currently has a market value of $8.5 million. The new machine is expected to have a four-year life. If the firm replaces the old machine with the new machine, it expects to save $5.5 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $450,000 in net working capital. The required return on the investment is 12 percent, and the tax rate is 35 percent.

a. What is the initial cost of this replacement?

b. What is the amount of change in the earnings before interest and taxes for the first year of this replacement?

c. What is the operating cash flow generated by the replacement?

d. What is the amount of the terminal cash flow after the net working capital is recovered?

e. What is the internal rate of return of this replacement?

Purchase this Solution
Solution Summary

The solution explains the calculation of cash flows and internal rate of return for a replacement decision

Purchase this Solution
Free BrainMass Quizzes
IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

View More Free Quizzes
Related BrainMass Solutions

  • Risk-adjusted NPV for G. Wolfe Corporation

    Wolfe Corporation is examining two capital-budgeting projects with 5-year lives. The first, project A, is a replacement project; the second, project B, is a project unrelated to current operations. The G.

  • What are the rights generally granted to common stockholders

    Such decisions might include the payment of dividends, a merger or acquisition opportunity, replacement of board members, or liquidation. Shareholders can vote in person at an annual meeting or they can submit a proxy vote by mail. 3.

  • Incremental Operating Cash Flows

    Estimate the incremental operating cash flows attributable to the replacement. Be sure to consier the depreciation in year 6. Wilbur Corporation is considering replacing a machine.

  • Determining the Value of Inventory under IFRS and US GAAP

    379297 Determining the Value of Inventory under IFRS and US GAAP The Golden Corporation has collected the following information for its main product: Cost 18.00 Replacement cost 17.00 Estimated cost to sell 5.00 Selling price 30.00 A profit

  • Excel: Relationship Between NPV and IRR

    life spans can also lead to incorrect decisions unless adjustments are made.

  • Replacement cost decisions

    Response provides steps to compute replacement cost decisions

  • Brown Corporation - IRR

    487597 Brown Corporation - IRR Brown Corporation recently purchase a new machine for $253,616 with a ten-year life. The old equipment has a remaining life of 10 years and no disposal value at the time of replacement.

  • Using capital budgeting techniques to evaluate the replacement project (NPV, IRR MIRR, PBP, or PI)

    525810 Using capital budgeting techniques to evaluate the replacement BPA Corporation is considering the purchase of a new electronic painting equipment to replace the existing equipment that has a book value of 3,000 and can be sold for 1,500.

  • Lower of Cost or Market

    Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product.

View More Related Solutions