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This is a decision to keep or replace current equipment, mutually exclusive alternatives. The question asks for the difference in the net present values of the two alternatives, not the net present value of one or the other. Use the present value tables on page 118 to compute present values.
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Nautical Creations is one of the largest producers of miniature ships in a bottle. An especially complex part of one of the ships needs special production equipment that is not useful for other products. The company purchased this equipment early in 2012 for $200,000. It is now early in 2015, and the manager of the Model Ships Division, Jeri Finley, is thinking about purchasing new equipment to make this part. The current equipment will last for six more years with zero disposal value at that time. It can be sold immediately for $40,000. The following are last year's per-unit manufacturing costs, when production was 7,600 ships:

Direct materials $3.60
Direct labor 3.55
Variable overhead 1.55
Fixed overhead 4.70
Total unit cost $13.40

The cost of the new equipment is $145,000. It has a six year useful life with an estimated disposal value at that time of $35,000. The sales representative selling the new equipment stated, "The new equipment will allow direct labor and variable overhead to be reduced by $2.25 per unit." Finley thinks this estimate is accurate, but also knows that a higher quality of direct material will be necessary with the new equipment, costing $0.17 more per unit. Fixed overhead costs will decrease by $4,300.

Finley expects production to increase to 8,000 ships in each of the next six years. Assume a discount rate of 5%.


REQUIRED

1. What is the difference in net present values if Nautical Creations buys the new equipment instead of keeping their current equipment?

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Elin Hessel
Elin HesselLv2
29 Sep 2019

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Question:

An organization is has $120,000 to invest and is currently considering a number of alternatives. One investment is to fund production process in which new machines will be purchased. The machines are expected to save production cost which is given below as Annual Income. The machines are expected to be part of the production process for 6 years. The company has a minimum attractive rate of return (MARR) of 10.0% compounded monthly. The following data is available for these new machines:

Alternative Initial investment Annual Income Annual Operation and Maintenance costs Salvage value
A 28000 9000 950 4000
B 40000 13000 1100 5700
C 65000 17000 1050 7600
D 80000 20900 1200 12100

This organization has also the option to buy bonds which have the following properties: - Bond is available at unit price of $1,000 - Face value of each bond is $9,00 - Nominal bond rate (nominal coupon rate) is 9.5%. - Bond maturity is 6 years after purchase. - Bond revenues (coupons) are received every month. - Bond is sold at face value at the end of the sixth year.

a] Calculate the Net Present Worth (NPW) and Internal Rate of Return (IRR) of alternatives A to D.

b] Rank these alternatives (A to D) based on NPW values.

d] Using incremental IRR analysis, rank these four alternatives based on economic feasibility.

e] Using incremental benefit-cost analysis, rank these four alternatives based on economic feasibility.

f] This organization now wants to allocate the investment fund of $120,000. The management is considering a mix of options which involve investing in A, B, C, D, or Bonds. The organization cannot invest twice in any single alternatives A to D. That is, it cannot invest in A twice. However, it can invest in two or more different alternatives. That is, it can invest in A and B. Bonds can also be bought in unlimited quantities. Based on this information, find the best fund allocation plan. Show clearly your calculation steps

I just need part E the rest has been answered

Mississippi Delta, Inc. has been selling switching equipment to computer companies on net-30 terms, in which payment is expected by 30 days from the invoice date. Concerned about deteriorating collection patterns, the credit manager has divided customers into two groups for examination purposes: Prompt payors and laggards. Prompt payors (80 percent of Mississippi Delta’s customers) pay, on average, in 35 days, versus a 72-day average for the laggards. The manager wonders if the credit terms should be modified to include a 2 percent cash discount on invoices paid within 10 days. The average invoice is the same for both groups, roughly $4,000. The manager expects 50% of the prompt payors to pay in exactly 10 days and the average on the other half to slip to 40 days. He thinks that 20% of the laggards will pay in 10 days and the average on the others will slip to 80 days. Given these forecasts, he is not sure that the lost revenue from discount takes (who would then pay only 98% of the invoiced dollar amount) justifies the improved collection. The company’s annual cost of capital is 11%. A.) Using NPV calculations, show the PV of the present collection experience. B.) Calculate the NPV of the proposed 2/10, net-30 terms. C.) Based on your NPV analysis, should Mississipi Delta Inc. adopt the cash discount? D.) What other factors should be taken into account before Mississippi Delta Inc. makes a switch, assuming such is justifiable on an NPV basis? E.) Sensivity analysis involves varying the key assumptions, one at a time, and observing the effect on the key decision criterion-such as profits or NPV. In the NPV analysis above, how could could one carry out sensitivity analysis? (If you have a financial spreadsheet available, conduct a sensitivity analysis that varies the number of prompt payors who will pay in exactly 10 days and report your findings.) *** Answer in an Excel document and give explanation as to how and why you got to your answer View comments (1) Expert Answer snarulatutor snarulatutor answered this 48 minutes later Was this answer helpful? 1 0 1,896 answers Since, there are multiple questions, the first four have been answered. ___________ Part A) To calculate the NPV, we need to determine the values of cash flows. Cash Flow on the 35th Day = Invoice Value*Customer Percentage Making the Payment on 35th Day = 4,000*80% = 3,200 Cash Flow on the 72th Day = Invoice Value*Customer Percentage Making the Payment on 72th Day = 4,000*20% = 800 The net present value of these 2 cash flows can be calculated as follows: Net Present Value = 3,200/(1+11%/365)^35 + 800/(1+11%/365)^72 = $3,949.26 ___________ Part B) To calculate the NPV, we need to determine the values of cash flows. Cash Flow on 10th Day = Invoice Value*Customer Percentage Taking Discount*(1-Discount Percentage) = 4,000*80%*50%*(1-2%) + 4,000*20%*20%*(1-2%) = $1,724.80 Cash Flow on 40th Day = Invoice Value*Customer Percentage Making Payment on 40th Day = 4,000*40% = $1,600 Cash Flow on 70th Day = Invoice Value*Customer Percentage Making Payment on 40th Day = 4,000*20%*80% = $640 The net present value of these 3 cash flows can be calculated as follows: Net Present Value = 1,724.80/(1+11%/365)^10 + 1,600/(1+11%/365)^40 + 640/(1+11%/365)^70 = $3,927.08 ___________ Part C) The net present value of cash flows with discount ($3,927.08) is less than the net present value of cash flows without discount ($3,949.26). Therefore, the company should not adopt the cash discount. ___________ Part D) Some of the other factors that should be taken into consideration include the possibility of default risk (as the credit period in case of laggards has increased to 80 resulting in higher probability of default). Another factor to be considered is the payment terms available from the suppliers. The company can adopt a cash discount policy, if it is also getting a discount on early payments to its suppliers. Credit policies used within the industry or by other companies of the same nature and size can be used as reference points while devising a credit policy.

I just need part E) and it explained

1) Due to a number of lawsuits related to toxic wastes, a major chemical company has recently experienced a market revaluation. The firm has bonds outstanding that were issued 10 years ago at their par value of $1,000. These bonds have 15 years to maturity and a coupon rate of 8 percent, with interest paid semiannually. The required return on these bonds has increased to 16 percent. What is the current value of one of these bonds?

2)A bond with a $1,000 face value and a 9 percent annual coupon pays interest annually. The bond matures in 12 years.

a)Determine the value of the bond to a friend of yours with a required rate of return of 11%.

b)A zero coupon bond with similar risk is selling for $300. The bond has a face value of $1,000 and matures in 12 years. Your friend asks you which bond she should invest in, the zero coupon bond or the bond in part (a). Which bond do you recommend, and why? Assume the market price of the bond in part (a) is $720.

3)If you are willing to pay $1,077 for a 15-year $1,000 par value bond that pays 9 percent interest semi-annually, what is your expected rate of return?

4)If the expected growth rate for dividends is zero, then the value of common stock will be equal to the current dividend.

a) true

b)false

5)Diana Ltd. paid a $4.50 per share dividend yesterday. The dividend is expected to grow at 9 percent per year for the foreseeable future. Diana Ltd. has a beta of 1.4, a standard deviation of returns of 28 percent, and a required return of 16%. What is the value of a share of Diana Ltd. common stock?

6)You purchased one share of Googling Enterprises common stock for $40 today. If the stock pays a dividend of $6.50 in one year, and sells for $50 at that time, what will the dividend yield, growth rate, and total rate of return be for the year?

7)Two projects are mutually exclusive if the accept/reject decision for one project has no impact on the accept/reject decision for the other project.

a)true

b)false

8)Rent-to-Own Equipment Co. is considering a new inventory system that will cost $450,000. The system is expected to generate positive cash flows over the next four years in the amounts of $250,000 in year one, $125,000 in year two, $110,000 in year three, and $80,000 in year four. Rent-to-Own's required rate of return is 10%. What is the internal rate of return of this project?

A)10.07%

b)11.89%

c)12.26%

d)12.69%

9)

Consider two mutually exclusive projects X and Y with identical initial outlays of $500,000 and useful lives of 5 years. Project X is expected to produce an after-tax cash flow of $150,000 each year. Project Y is expected to generate a single after-tax net cash flow of $1,015,000 in year 5. The discount rate is 15 percent.

a)Calculate the net present value for each project.

b)Calculate the IRR for each project.

c)What decision should you make regarding these projects?

10)

If a firm’s tax rate increases then its weighted average cost of capital increases also.

a)True

b)False

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