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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

Essentials of Business Analytics (MindTap Course List)
Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Chapter15: Decision Analysis
Section: Chapter Questions
Problem 5P: Hudson Corporation is considering three options for managing its data warehouse: continuing with its...
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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
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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