Option A: Year Cash Flows PV factor Present Value 11% Initial Investment Annual Cash Flows 1-8 Cost to Rebuild 4 Salvage 8 Net Present Value Option B: Year Cash Flows PV factor Present Value 11% Initial Investment Annual Cash Flows 1-8 Cost to Rebuild 4 Salvage 8. Net Present Value Determine which option Tulsa should select? OOption B O Option A
Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa’s cost of capital is 11 percent. The following estimates of the
Option A | Option B | |||||
Initial investment | $ | 320,000 | $ | 454,000 | ||
Annual |
150,000 | 160,000 | ||||
Annual |
70,000 | 75,000 | ||||
Costs to rebuild | 120,000 | 0 | ||||
Salvage value | 0 | 24,000 | ||||
Estimated useful life | 8 | years | 8 | years | ||
Required:
Calculate NPV. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.)
![Option A:
Year
Cash Flows
PV factor
Present Value
11%
Initial Investment
Annual Cash Flows
1-8
Cost to Rebuild
4
Salvage
8
Net Present Value
Option B:
Year
Cash Flows
PV factor
Present Value
11%
Initial Investment
Annual Cash Flows
1-8
Cost to Rebuild
4
Salvage
8.
Net Present Value
Determine which option Tulsa should select?
OOption B
O Option A](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fabec27d7-ece1-4ee9-9bb7-845ecd00cf57%2Fb8d29e51-932e-4223-aeac-755cf775cd42%2F9chi429.png&w=3840&q=75)
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