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  • Baldwin Case Solution

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    Baldwin Company is investigating whether to purchase a new bowling ball machine. The machine would cost $100,000 and have a useful life of five years. The estimated market value at the end of five years is $30,000. The machine is depreciated using MACRS depreciation (rates for a five-year asset = 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%). If the machine is purchased, the company will produce the bowling balls in a building that could be sold for $150,000 (net after taxes). The company expects working capital needs to increase by $10,000 when the machine is purchased and to be 10% of revenue each year, except in the last year of the machine’s life when working capital will be reduced to zero as the machine is sold. The company expects to produce the following during the life of the machine: Year Units produced 1 5,000 2 8,000 3 12,000 4 10,000 5 6,000 The units are expected to sell for $20 per unit the first year and then increase by 2% per year. Operating costs are expected to be $10 per unit the first year and then to increase by 10% per year. The company’s marginal tax rate is 34%. Should Baldwin accept this project if the appropriate discount rate for this project is 10%?

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    Baldwin Company is investigating whether to purchase a new bowling ball machine. The machine would cost $100,000 and have a useful life of five years. The estimated market value at the end of five years is $30,000. The machine is depreciated using MACRS depreciation (rates for a five-year asset = 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%). If the machine is purchased, the company will produce the bowling balls in a building that could be sold for $150,000 (net after taxes). The company expects working capital needs to increase by $10,000 when the machine is purchased and to be 10% of revenue each year, except in the last year of the machine’s life when working capital will be reduced to zero as the machine is sold. The company expects to produce the following during the life of the machine: Year Units produced 1 5,000 2 8,000 3 12,000 4 10,000 5 6,000 The units are expected to sell for $20 per unit the first year and then increase by 2% per year. Operating costs are expected to be $10 per unit the first year and then to increase by 10% per year. The company’s marginal tax rate is 34%. Should Baldwin accept this project if the appropriate discount rate for this project is 10%?

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    41 Ansichten1 Seite

    Baldwin Case Solution

    Hochgeladen von

    branco_kalesaran
    Baldwin Company is investigating whether to purchase a new bowling ball machine. The machine would cost $100,000 and have a useful life of five years. The estimated market value at the end of five years is $30,000. The machine is depreciated using MACRS depreciation (rates for a five-year asset = 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%). If the machine is purchased, the company will produce the bowling balls in a building that could be sold for $150,000 (net after taxes). The company expects working capital needs to increase by $10,000 when the machine is purchased and to be 10% of revenue each year, except in the last year of the machine’s life when working capital will be reduced to zero as the machine is sold. The company expects to produce the following during the life of the machine: Year Units produced 1 5,000 2 8,000 3 12,000 4 10,000 5 6,000 The units are expected to sell for $20 per unit the first year and then increase by 2% per year. Operating costs are expected to be $10 per unit the first year and then to increase by 10% per year. The company’s marginal tax rate is 34%. Should Baldwin accept this project if the appropriate discount rate for this project is 10%?

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    von 1

    BOOK CASE #1

    BALDWIN CASE SOLUTION


    BALDWIN COMPANY
    Operating cash flows
    Change in revenues
    Change in expenses
    Change in depreciation
    1-Tax rate
    Net Income
    Change in depreciation
    Change in net working capital**
    Change in operating cash flows
    Use formula:
    OCF = (R-E-D)(1-T)+D-NWC
    Investment cash flows
    Purchase of machine
    Investment in working capital
    Forgone opportunity to sell building
    Sale of machine
    Tax effects of sale*
    Released opportunity costs
    Total investment cash flows
    Net cash flows (investment + operating)
    Discounting each cash flow at 10%
    Sum of discounted cash flows = NPV
    Notes:
    Units produced
    Sales growing at 2% per year
    To determine price per unit
    Price per unit
    Costs growing at 10% per year
    To determine cost per unit
    Cost per unit
    Revenues = Units x Price per unit
    Expenses = Units x Cost per unit
    MACRS rate
    Depreciation = MACRS rate x Cost
    NWC =10% of revenues
    Net working capital at end of period
    Change in net working capital**
    Sale of machine
    Book value of machine
    Selling price - book value = gain
    Gain is taxed at ordinary rate*

    Year 0

    Year 1

    Year 2

    Year 3

    Year 4

    Year 5

    100,000
    50,000
    20,000
    0.66
    $19,800
    20,000
    $0

    163,200
    88,000
    32,000
    0.66
    $28,510
    32,000
    $6,320

    249,696
    145,200
    19,200
    0.66
    $56,295
    19,200
    $8,650

    212,242
    133,100
    11,520
    0.66
    $44,630
    11,520
    -$3,745

    129,892
    87,846
    11,520
    0.66
    $20,147
    11,520
    -$21,224

    39,800

    54,192

    66,846

    59,896

    52,891

    -100,000
    -10,000
    -150,000
    30,000
    -8,242
    150,000
    -260,000

    171,758

    -260,000
    -260,000
    51,590

    39,800
    36,182
    ACCEPT

    54,192
    44,787

    66,846
    50,222

    59,896
    40,910

    224,650
    139,490

    Year 1
    5,000

    Year 2
    8,000

    Year 3
    12,000

    Year 4
    10,000

    Year 5
    6,000

    $20
    $20.00

    $20 x 1.02 $20.40 x 1.02 $20.8 1x 1.02


    $20.40
    $20.81
    $21.22

    $21.65

    $10
    $10.00
    $100,000
    $50,000
    20%
    $20,000

    $10 x 1.10 $11.00 x 1.10 $12.10 x 1.10


    $11.00
    $12.10
    $13.31
    $163,200
    $249,696
    $212,242
    $88,000
    $145,200
    $133,100
    32%
    19.20%
    11.52%
    $32,000
    $19,200
    $11,520

    $14.64
    $129,892
    $87,846
    11.52%
    $11,520

    $10,000

    100,000 x
    5.76%
    24,240*0.34

    $10,000
    $0
    30,000
    5,760

    $16,320
    $6,320

    $24,970
    $8,650

    $21,224
    -$3,745

    24,240 over depreciated


    8,242

    ** Changes in NWC are included in the investment cash flows in the case solution guide given in the
    textbook!

    0.0
    -$21,224

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