Assess Capital Budgeting Problems – Replacement Project

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Background information:
The capital budgeting process includes both expansionary type problems and replacement problems. In this activity, we consider a replacement problem. In a replacement problem, we are interested in evaluating whether a new machine/asset offers enough benefits in terms of future cash flows to justify the capital expenditure. The key to completing this type of analysis is the concept of incremental. This means we want to think in terms of subtracting the old cash flows on the existing machine from the net cash flows on the new machine. Commonly, in this type of a problem, we will assume that the impact on sales revenue is zero and that the analysis comes down to weighing the costs of the new machine against the expense reduction offered by the new machine. For each machine, we again develop the free cash flows as follows:

Free Cash Flows = [EBIT(1-tax rate) + Depreciation and Amortization] – [Additional capital expenditures – additional net working capital]

The EBIT is defined as sales fewer variables, expenses less fixed expenses, less depreciation. We form the FCFs for each machine for each year into the future, and then the difference these future FCFs make to generate the incremental cash flows.

Reference:

1. Fundamentals of financial management (15th ed.)

2. Curmei Cătălin-Valeriu, Dincă Lavinia Elena, & Curmei-Semenescu Ileana Andreea. (2018). The influence of the strategic financial policies on share…

3. Li, H., Peng, J., & Li, S. (2015). Uncertain programming models for capital budgeting subject to experts’ estimations.

4. Trejo-Pech, C. J. O., Spreen, T. H., & Zansler, M. L. (2018). Is Growing Oranges in Florida a Good Investment? AMERICAN JOURNAL OF AGRICULTURAL ECONOM

Write a technical report:

Assume that a company’s machine was bought 10 years ago at a cost of $200,000. The machine had an expected life of 20 years at the time it was bought with a $0 salvage value. The annual depreciation expense is $10,000 and the current book value is $100,000. The market value of this machine is $90,000. A company is considering buying a new machine that costs $140,000, which has a projected 10-year life. The new machine is expected to reduce the firm’s operating expenses from $30,000 to $12,000. With the new machine, the firm’s pre-tax profits are anticipated to increase by $18,000 per year. If the company buys this new machine, the old machine will be sold. It’s projected that the new machine can be sold for $5,000 at the end of its life. The cost of capital is calculated based upon funding from retained earnings and from debt. The company is assumed to fund itself with 40% debt and 60% retained earnings. The cost of debt capital, rD, is 8%. The cost of capital from retained earnings, rS, is based upon the Capital Asset Pricing Model. The risk-free rate in the market is 3% and the difference between the expected return on the market and the risk-free rate is 5%. The beta of the company is 1.5. The tax rate is assumed to be 35%. Should the company buy a new machine? Please justify your answer. Please use Excel for the calculations. Please write your answers to the qualitative question in an MS Word document and paste your spreadsheet work into the Word document.

Sample Solution

foundation for knowledge. The two sources of knowledge that he writes about are from the senses and the intellect. Descartes presents the question: are the senses a reliable source of knowledge? This brings us to Descartes argument from Dreaming. In this theory, you compare your dreaming state with your waking state. When we are dreaming, we are not aware that we are dreaming. Things that later strike us as fuzzy, incoherent, far-fetched, or impossible, don’t seem so far within the dream. So that brings up the question: how can we be certain that the experiences we have now are reliable? However, it is worth noting that this is not Descartes own position. His own position is stated in the 6th meditation where he suggests that there are marks present in one’s waking experience in which we can distinguish waking from sleeping. The dream images we imagine are drawn from waking experience. For example, like painting, when a painter creates an imaginary creature like a minotaur, he or she will get the parts of the minotaur from things in real life: horse and man. The painter can doubt composite things, things that are made up together, but cannot doubt the simple and universal parts from which they are constructed. This can be quantity, size, etc. We can doubt studies that are based on composite things, such as medicine, astronomy, or physics, but subjects like arithmetic and geometry are undoubtable.

In Meditation One, Descartes believes that there is indeed a God, someone who is as he says, “all-powerful.” Descartes states, “Perhaps, indeed, there might be some people who would prefer to deny the existence of any God so powerful, rather than believing that all other things are uncertain.” In other words, there are possibly other people who would deny that there is a God than to believe that everything else in the world does not exist. Descartes believes that God?

is being and all other things are not being. All other things in the world compared to God are subordinate because God is almighty.
Another one of Descartes’ theories in Meditation One is the Evil Demon Argument. It is also worth noting that is this not Descartes own position, but uses it as an argumentative device. The Evil Demon Argument states that an evil demon has the will, power, and the knowledge to make a person a constant victim of deception. Even one is thinking something is self-evidently true, it’s not.

There is a distinction between the mind and the body. The mind is essentially thi

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