Drew owns and operates an onion packing plant. To bag and transfer the bags to pallets, Drew has two options. He can invest in a fully automatic bagging machine and palletizing machine or he can have partially automated baggers and have workers place the bags onto the pallets. The first option is a higher initial investment but has significant labor-cost savings. The second option is a lower investment but has higher labor costs over the long run. After laying out the cash flows, Drew has determined that the fully automatic process has a NPV of $168,839.76 over 10 years. The more labor intensive option has a NPV of $129,010.90 over 7 years. Drew's required rate of return is 10%, the inflation rate is 1%, the risk premium is 1% and the marginal tax rate is 30%. 1. What is the Real Discount Rate? a.6.27% b.5.29% c.6.63% d.6.75% 2. What is the annuity equivalent for the fully automatic bagging machine and palletizing machine? a.$12,583.60 b.$25,243.07 c.$22,383.79 d.$23,633.53 3. What is the annuity equivalent for the partially automated baggers with workers placing the bags on pallets? a.$18,380.24 b.$15,367.78 c.$12,758.23 d.$23,633.53 4. If Drew makes his decision based on the Annuity Equivalents, which should he choose? a.fully automatic bagging machine and palletizing machine b.partially automated baggers with workers placing the bags on pallets c.Indifferent between the two
Drew owns and operates an onion packing plant. To bag and transfer the bags to pallets, Drew has two options. He can invest in a fully automatic bagging machine and palletizing machine or he can have partially automated baggers and have workers place the bags onto the pallets. The first option is a higher initial investment but has significant labor-cost savings. The second option is a lower investment but has higher labor costs over the long run. After laying out the cash flows, Drew has determined that the fully automatic process has a NPV of $168,839.76 over 10 years. The more labor intensive option has a NPV of $129,010.90 over 7 years. Drew's required rate of return is 10%, the inflation rate is 1%, the risk premium is 1% and the marginal tax rate is 30%. 1. What is the Real Discount Rate? a.6.27% b.5.29% c.6.63% d.6.75% 2. What is the annuity equivalent for the fully automatic bagging machine and palletizing machine? a.$12,583.60 b.$25,243.07 c.$22,383.79 d.$23,633.53 3. What is the annuity equivalent for the partially automated baggers with workers placing the bags on pallets? a.$18,380.24 b.$15,367.78 c.$12,758.23 d.$23,633.53 4. If Drew makes his decision based on the Annuity Equivalents, which should he choose? a.fully automatic bagging machine and palletizing machine b.partially automated baggers with workers placing the bags on pallets c.Indifferent between the two
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Drew owns and operates an onion packing plant. To bag and transfer the bags to pallets, Drew has two options. He can
invest in a fully automatic bagging machine and palletizing machine or he can have partially automated baggers and
have workers place the bags onto the pallets. The first option is a higher initial investment but has significant labor-cost
savings. The second option is a lower investment but has higher labor costs over the long run. After laying out the cash
flows, Drew has determined that the fully automatic process has a NPV of $168,839.76 over 10 years. The more labor
intensive option has a NPV of $129,010.90 over 7 years. Drew's required rate of return is 10%, the inflation rate is 1%, the
risk premium is 1% and the marginal tax rate is 30%.
1. What is the Real Discount Rate?
a.6.27%
b.5.29%
c.6.63%
d.6.75%
2. What is the annuity equivalent for the fully automatic bagging machine and palletizing machine?
a.$12,583.60
b.$25,243.07
c.$22,383.79
d.$23,633.53
3. What is the annuity equivalent for the partially automated baggers with workers placing the bags on pallets?
a.$18,380.24
b.$15,367.78
c.$12,758.23
d.$23,633.53
4. If Drew makes his decision based on the Annuity Equivalents, which should he choose?
a.fully automatic bagging machine and palletizing machine
b.partially automated baggers with workers placing the bags on pallets
c.Indifferent between the two
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