Angler Corp. is considering purchasing one of two new processing machines. Either machine would make it possible for the company to produce its products more efficiently than it is currently equipped to do. Estimates regarding each machine are provided below: Machine A $113,250 10 years -0- Machine B $270,000 Original cost Estimated life Salvage value Estimated annual cash inflows 10 years -0- $30,000 $ 7,500 S60,000 Estimated annual cash outflows $15,000 (a) Calculate the net present value and profitability index of each machine. Assume an 8% discount rate. Which machine should be purchased? (b) Angler Corp. did some further research and found one other possible machine that would produce the same type of production efficiencies. The information regarding Machine C is below: Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows Machine C $250,000 10 years $ 30,000 $ 45,000 $ 10,000 (1) Calculate the net present value and profitability index for Machine C. Use an 8% discount rate. (2) Rank the investments based on net present value. Which machine would be chosen based on this calculation? (3) Rank the investments based on profitability index. Which machine would be chosen based on this calculation? (4) Which machine should be purchased based on all the information provided? Discuss your reasons why.
Angler Corp. is considering purchasing one of two new processing machines. Either machine would make it possible for the company to produce its products more efficiently than it is currently equipped to do. Estimates regarding each machine are provided below: Machine A $113,250 10 years -0- Machine B $270,000 Original cost Estimated life Salvage value Estimated annual cash inflows 10 years -0- $30,000 $ 7,500 S60,000 Estimated annual cash outflows $15,000 (a) Calculate the net present value and profitability index of each machine. Assume an 8% discount rate. Which machine should be purchased? (b) Angler Corp. did some further research and found one other possible machine that would produce the same type of production efficiencies. The information regarding Machine C is below: Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows Machine C $250,000 10 years $ 30,000 $ 45,000 $ 10,000 (1) Calculate the net present value and profitability index for Machine C. Use an 8% discount rate. (2) Rank the investments based on net present value. Which machine would be chosen based on this calculation? (3) Rank the investments based on profitability index. Which machine would be chosen based on this calculation? (4) Which machine should be purchased based on all the information provided? Discuss your reasons why.
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:CASE 7
Angler Corp. is considering purchasing one of two new processing machines. Either machine would make
it possible for the company to produce its products more efficiently than it is currently equipped to do.
Estimates regarding each machine are provided below:
Original cost
Estimated life
Salvage value
Estimated annual cash inflows
Machine A
$113,250
10 years
-0-
Machine B
$270,000
10 years
-0-
$30,000
$ 7,500
S60,000
$15,000
Estimated annual cash outflows
(a) Calculate the net present value and profitability index of each machine. Assume an 8% discount
rate. Which machine should be purchased?
(b) Angler Corp. did some further research and found one other possible machine that would produce
the same type of production efficiencies. The information regarding Machine C is below:
Original cost
Estimated life
Salvage value
Estimated annual cash inflows
Machine C
$250,000
10 years
$ 30,000
$ 45,000
$ 10,000
Estimated annual cash outflows
(1) Calculate the net present value and profitability index for Machine C. Use an 8% discount rate.
(2) Rank the investments based on net present value. Which machine would be chosen based on
this calculation?
(3) Rank the investments based on profitability index. Which machine would be chosen based on
this calculation?
(4) Which machine should be purchased based on all the information provided? Discuss your
reasons why.
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