Smithy Ltd wants to invest in a new machine cooling system. There are three different systems currently in the market: Water-cooled Refrigerant Air-cooled Initial investment 488,000 990,000 1,020,000 Regular maintenance costs per annum 86,000 27,000 80,000 Scheduled major maintenance costs 46,000 72,000 44,000 Energy cost per annum 90,000 60,000 75,000 Other operating cost per annum 107,000 45,000 - Waste per annum 230,000 kilolitres of water* 50 litres of NH3** - Sound tiers (decibels)*** 95 55 85 The water-cooled system and refrigerant system requires a major maintenance at the end of every five years, while the air-cooled system requires a major maintenance at the end of every 10 years. The required rate of return is 10% for all capital investments. Assume a time horizon of 12 years. Ignore tax effects. Required: Calculate the net present value of the three systems. Which option is superior on financial grounds? Assume that Smith Ltd is located near a residential district and wants to minimise disruption to local residents and minimise their environmental impact. Which system would you recommend and why?
Smithy Ltd wants to invest in a new machine cooling system. There are three different systems currently in the market: Water-cooled Refrigerant Air-cooled Initial investment 488,000 990,000 1,020,000 Regular maintenance costs per annum 86,000 27,000 80,000 Scheduled major maintenance costs 46,000 72,000 44,000 Energy cost per annum 90,000 60,000 75,000 Other operating cost per annum 107,000 45,000 - Waste per annum 230,000 kilolitres of water* 50 litres of NH3** - Sound tiers (decibels)*** 95 55 85 The water-cooled system and refrigerant system requires a major maintenance at the end of every five years, while the air-cooled system requires a major maintenance at the end of every 10 years. The required rate of return is 10% for all capital investments. Assume a time horizon of 12 years. Ignore tax effects. Required: Calculate the net present value of the three systems. Which option is superior on financial grounds? Assume that Smith Ltd is located near a residential district and wants to minimise disruption to local residents and minimise their environmental impact. Which system would you recommend and why?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Smithy Ltd wants to invest in a new machine cooling system. There are three different systems currently in the market:
|
|
Water-cooled |
Refrigerant |
Air-cooled |
|
Initial investment |
488,000 |
990,000 |
1,020,000 |
|
Regular maintenance costs per annum |
86,000 |
27,000 |
80,000 |
|
Scheduled major maintenance costs |
46,000 |
72,000 |
44,000 |
|
Energy cost per annum |
90,000 |
60,000 |
75,000 |
|
Other operating cost per annum |
107,000 |
45,000 |
- |
|
Waste per annum |
230,000 kilolitres of water* |
50 litres of NH3** |
- |
|
Sound tiers (decibels)*** |
95 |
55 |
85 |
The water-cooled system and refrigerant system requires a major maintenance at the end of every five years, while the air-cooled system requires a major maintenance at the end of every 10 years.
The required
Required:
- Calculate the
net present value of the three systems. Which option is superior on financial grounds? - Assume that Smith Ltd is located near a residential district and wants to minimise disruption to local residents and minimise their environmental impact. Which system would you recommend and why?
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