Sancheti company, a maker of skating gear, is evaluating two alternative presses. Press A costs $85,000, has a 4-year life, and is expected to generate annual cash inflows of $30,500 in each of the 4 years. Press B costs $123,500, has an 8-year life, and is expected to generate annual cash inflows of $25,300 in each of 8 years. The cost of replacement for Press A is $86,000, and the replacement press will generate cash inflows of $32,200 for another 4 years. Sancheti company uses a 13% cost of capital. Which press should be chosen and why?

Sancheti company, a maker of skating gear, is evaluating two alternative presses. Press A costs $85,000, has a 4-year life, and is expected to generate annual cash inflows of $30,500 in each of the 4 years. Press B costs $123,500, has an 8-year life, and is expected to generate annual cash inflows of $25,300 in each of 8 years. The cost of replacement for Press A is $86,000, and the replacement press will generate cash inflows of $32,200 for another 4 years. Sancheti company uses a 13% cost of capital. Which press should be chosen and why?

Name: Sancheti company, a maker of skating gear, is evaluating two alternati
Uploaded: 2024-03-20T06:50:59.000Z
Channel: Bartleby
Description: Sancheti company, a maker of skating gear, is evaluating two alternative presses. Press A costs $85,000, has a 4-year life, and is expected to generate annual cash inflows of $30,500 in each of the 4 years. Press B costs $123,500, has an 8-year life,

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

See similar textbooks

Similar questions

Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Rollerblade, a maker of skating gear, is evaluating two alternative presses. Press A costs $88,000, has a 4-year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years. Press B costs $120,000, has an 8-year life, and is expected to generate annual cash inflows of $24,800 in each of 8 years. The cost of replacement for Press A is $94,000, and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a 11% cost of capital. Which press should be chosen?
Rollerblade, a maker of skating gear, is evaluating two alternative presses. Press A costs $88,000, has a 4-year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years. Press B costs $122,000, has an 8-year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years. The cost of replacement for A is $96,000, and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a 12% cost of capital. Which press should be chosen?
Porcelain Computer Company is considering purchasing two different types of servers. Server A will generate net cash inflows of $26,000 per year and have a zero residual value. Server A's estimated useful life is three years, and it costs $46,000. Server B will generate net cash inflows of $30,000 in year 1. $12,000 in year 2, and $4,000 in year 3. Server B has a $5,000 residual value and an estimated useful life of three years. Server B also costs $46,000 Porcelain Computer Company's required rate of return 14%. Read the requirements. Requirement 1. Calculate payback, accounting rate of return, net present value, and internal rate of return for both server investments. Use Microsoft Excel to calculate NPV and IRR Begin with the payback period for Server A. (Round your answer to one decimal place, X.X.) Amount invested Expected annual net cash inflow 26000 Server A Now determine the payback period for Server B. (Round your answer to one decimal place, X.X.) The payback period for…
Apricot Computers is considering replacing its material handling system and either purchasing or leasing a new system. The old system has an annual operating and maintenance cost of $35,000, a remaining life of 8 years, and an estimated salvage value of $5,100 at that time. A new system can be purchased for $286,000; it will be worth $26,000 in 8 years; and it will have annual operating and maintenance costs of $18,000/year . If the new system is purchased, the old system can be traded in for $18,000. Leasing a new system will cost $27,000/year , payable at the beginning of the year, plus operating costs of $9,100/year , payable at the end of the year. If the new system is leased, the old system will be sold for $10,000. MARR is 14%. Compare the annual worths of keeping the old system, buying a new system, and leasing a new system based upon a planning horizon of 8 years. What is the EUAC of the best option using the cash flow approach?
Apricot Computers is considering replacing its material handling system and either purchasing or leasing a new system. The old system has an annual operating and maintenance cost of $31,000, a remaining life of 8 years, and an estimated salvage value of $4,800 at that time. A new system can be purchased for $284,000; it will be worth $24,000 in 8 years; and it will have annual operating and maintenance costs of $16,000/year. If the new system is purchased, the old system can be traded in for $22,000. Leasing a new system will cost $25,000/year, payable at the beginning of the year, plus operating costs of $7,400/year, payable at the end of the year. If the new system is leased, the old system will be sold for $9,600. MARR is 16%. Compare the annual worths of keeping the old system, buying a new system, and leasing a new system based upon a planning horizon of 8 years. Click here to access the TVM Factor Table Calculator For calculation purposes, use 5 decimal places as displayed in the…
A highway contractor is considering buying a new trench excavator that costs $130000 and can dig a 1-metre-wide trench at the rate of 5 metres per hour. With the machine adequately maintained, its production rate will remain constant for the first 1200 hours of operation and then decrease by 0.5 metres per hour each year. The excavator is expected to dig 2 kilometres each year. Maintenance and operating costs will be $15 per hour. The excavator has a CCA rate of 30%. At the end of five years, the excavator will be sold for $33000. Assuming that the contractor's marginal tax rate is 34% per year, determine the annual after-tax cash flow. Please use MARR=0% for this question. Net Present Worth (MARR)=$ Net Annual Worth (MARR)=$ IRR= % Year 0 1 2 3 4 5 Cash flow $ $ $ $ $ $
Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $220,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $13,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $42,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow 1/2 of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to 3 equal annual payments, with the 1st payment due at the end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics' MARR is 10% compounded annually. Part a What is the annual worth of this investment? $
The replacement of a planing machine is being considered by the Reardorn Furniture Company. (There is an indefinite future need for this type of machine.) The best challenger will cost $30,000 for installation and will have an estimated economic life of 12 years and a $2,000 MV at that time. It is estimated that annual expenses will average $16,000 per year. The defender has a present BV of $6,000 and a presentMV of $4,000. Data for the defender for the next three years are as follows: Using a before-tax interest rate of 15% per year, make a comparison to determine whether it is economical tomake the replacement now.
Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $40,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow half of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to three equal annual payments, with the first payment due at end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics’ MARR is 10% compounded annually. Solve, a. What is the internal rate of return of this investment? b. What is the decision rule for judging the attractiveness of investments based on internal rate of…
Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $40,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow half of the purchase price, but it cannot start repaying the loan for 2 years. The bank has agreed to three equal annual payments, with the first payment due at the end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics’ MARR is 10% compounded annually. Solve, a. What is the annual worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on annual worth? c. Should…
Aerotron Electronics is considering purchasing a water filtration system to assist in circuit board manufacturing. The system costs $40,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow half of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to three equal annual payments, with the first payment due at the end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics’ MARR is 10% compounded annually. a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investmentsbased on present worth? c. Should Aerotron…