Max is planning to buy an equipment. Model X cost $300 to purchases and result is a costing savings of $150 per year, and last for 5 years. Model Z cost $450, result in costs savings of $130 per year, and last for 10 years. The discount rate is 20%. Required: a. Calculate the appropriate NPV for both the models. b. Calculate the approximate IRR for both the models. c. Calculate the Payback period for both the models.

Max is planning to buy an equipment. Model X cost $300 to purchases and result is a costing savings of $150 per year, and last for 5 years. Model Z cost $450, result in costs savings of $130 per year, and last for 10 years. The discount rate is 20%. Required: a. Calculate the appropriate NPV for both the models. b. Calculate the approximate IRR for both the models. c. Calculate the Payback period for both the models.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Required:

a. Calculate the appropriate NPV for both the models.

b. Calculate the approximate IRR for both the models.

c. Calculate the Payback period for both the models.

d. Which model should Max buy.

e. If the inflation rate is expected to be 10%, will your advice to Max change.

Definition Definition Discount rate of a project wherein its net present value equals zero. Internal rate of return equates the present value of future cash flows with the initial investments. Internal rate of return helps to determine nominal cash flows.

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