A construction company is evaluating two options for an elevator, each of which has a useful life in 10 years. Option 1 costs $45, 000 to install and $2700 annually, with a salvage value of $ 3000 in year 10. Option 1 also requires a significant overhaul in year 6 with a cost of $8, 000. Option 2 costs $54, 000, costs $2, 800 annually, and has a salvage value of $5000 in year 10. Annual interest is 4%, compounded monthly. Which option would you choose? Show your work.

A construction company is evaluating two options for an elevator, each of which has a useful life in 10 years. Option 1 costs $45, 000 to install and $2700 annually, with a salvage value of $ 3000 in year 10. Option 1 also requires a significant overhaul in year 6 with a cost of $8, 000. Option 2 costs $54, 000, costs $2, 800 annually, and has a salvage value of $5000 in year 10. Annual interest is 4%, compounded monthly. Which option would you choose? Show your work.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section9.A: Depreciation

Problem 1P

See similar textbooks

Similar questions

The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and Machine 360-6, which has a cost of $360,000, a 6-year life, and after-tax cash flows of $98,300 per year. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Filkins’ cost of capital is 14%. Should the firm replace its old knitting machine? If so, which new machine should it use? By how much would the value of the company increase if it accepted the better machine? What is the equivalent annual annuity for each machine?
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
The initial cost of a new machine is $10,000. The annual operating cost is $1,000/yr for first 3 years, and then becomes $3,000/yr after that. The machine needs a major repair at the end of 5th year, which costs $5,000. The machine has 10 years useful life with salvage value of $4,000. Calculate EUAC for keeping the machine for 10 years. (i=10%/yr)
One of two methods must be used to produce expansion anchors. Method A costs $75,000 initially and will have a $19,000 salvage value after 3 years. The operating cost with this method will be $23,000 per year. Method B will have a first cost of $110,000, an operating cost of $19,000 per year, and a $31,000 salvage value after its 3-year life. The interest rate for both the methods is 11%. Which method should be used on the basis of a present worth analysis? The present worth of method A is (about -117,000) and that of method B is (is not about -172,000)
A presently owned machine can last 3 more years, if properly maintained at a cost of $15,000 per year. Its AOC is $31,000 per year. After 3 years, it can be sold for an estimated $9000. A replacement costs $80,000 with a $10,000 salvage value after 3 years and an operating cost of $19,000 per year. Different vendors have offered $10,000 and $20,000, respectively, for the current system as trade-in for the replacement machine. At i = 12% per year, perform a replacement study and determine whether the defender should be retained or replaced.
One of two methods must be used to produce expansion anchors. Method A costs $80,000 initially and will have a $15,000 salvage value after 3 years. The operating cost with this method will be $30,000 per year. Method B will have a first cost of $120,000, an operating cost of $8000 per year, and a $40,000 salvage value after its 3-year life. At an interest rate of 12% per year, which method should be used on the basis of a present worth analysis? Also, write the two spreadsheet functions to perform the PW analysis.
An engineer has designed 2 alternative systems to cater for customer's plant operation. System 1 will need initial investment of $150,000 and will have an annual operating cost of $20,000 with salvage price of $5,000 after 4 years. System 2 will need an investment of $180,000 and the annual operating cost will be $15,000. System can be salvaged for $8,000 after 6 years. At an interest rate of 10% per year, which system should be proposed by the engineer on the basis of a present worth analysis? Use equations to solve this problem.
Two techniques can be used to produce expansion anchors. Technique A costs $90,000 initially and will have a $12,000 salvage value after 3 years. The operating cost with this method will be $33,000 in year 1, increasing by $2600 each year. Technique B will have a first cost of $113,000, an operating cost of $7000 in year 1, increasing by $7000 each year,and a $43,000 salvage value after its 3-year life. At an interest rate of 13% per year, which technique should be used on the basis of a present worth analysis? Notice that there are no revenues. Please work out and do not use excel, however if you use excel please show how to input everything needed down to the formula, thank you!
Two methods can be used to produce expansion anchors. Method A costs $ 70, 000 initially and will have a $15,000 salvage value after 3 years. The operating cost with this method will be $36,000 in year 1, increasing by $3200 each year. Method B will have a first cost of $ 116,000, an operating cost of $10000 in year 1, increasing by $10000 each year, and a $46, 000 salvage value after its 3 year life. At an interest rate of 8% per year, which method should be used on the basis of a present worth analysis?