T & T company has to purchase some new equipment. Twomanufacturers have provided the following information:
Equipment X
Equipment Y
Initial costs
$135,000
$180,000
Estimated life
5 years
5 years
Annual savings
$45,000
$48,000
Because the company requires a present value analysis, thefollowing present value factors are furnished:
Period
Present Value of $1.00
Present Value of an Annuity of $1.00
1
0.90
0.90
2
0.85
1.75
3
0.75
2.50
4
0.65
3.15
5
0.60
3.75
Required:
a.
Determine the present value of annual savings for each piece ofequipment. Show your calculations clearly.
b.
What is the payback for each piece of equipment? Show yourcalculations clearly.
c.
Which investment is preferable? Why?
T & T company has to purchase some new equipment. Twomanufacturers have provided the following information:
Equipment X | Equipment Y | |
Initial costs | $135,000 | $180,000 |
Estimated life | 5 years | 5 years |
Annual savings | $45,000 | $48,000 |
Because the company requires a present value analysis, thefollowing present value factors are furnished:
Period | Present Value of $1.00 | Present Value of an Annuity of $1.00 |
1 | 0.90 | 0.90 |
2 | 0.85 | 1.75 |
3 | 0.75 | 2.50 |
4 | 0.65 | 3.15 |
5 | 0.60 | 3.75 |
Required:
a. | Determine the present value of annual savings for each piece ofequipment. Show your calculations clearly. |
b. | What is the payback for each piece of equipment? Show yourcalculations clearly. |
c. | Which investment is preferable? Why? |
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Related questions
QUESTION 1
Which of the following statements is correct regarding thepayback method as a capital budgeting technique?
The payback method considers the time value of money. | ||
An advantage of the payback method is that it indicates if aninvestment will be profitable. | ||
The payback method provides the years needed to recoup theinvestment in a project. | ||
Payback is calculated by dividing the annual cash inflows by thenet investment. |
0.625 points
QUESTION 2
Taxes are not an important consideration indeveloping cash flow assessments.
True
False
0.625 points
QUESTION 3
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2)QUESTIONS:
Parkways Inc. is considering the purchase of a new machine. Themachine will cost $60,000 to purchase and will generate $15,000 ofcash revenues per year for the next 8 years. The machine will cost$1,000 per year to operate & maintain. At the end of it'suseful life, it has an estimated salvage value of $5,000. Parkwaysrequires a minimum rate of return of 14% for this class of asset.Determine the Net Present Value of this investment proposal.
PV of $1 (14%, 8n) is .351; PVOA (14%, 8n) is 4.639
$6,701 | ||
$57,000 | ||
$1,166 | ||
$0 |
0.625 points
QUESTION 4
Sun Devil Corporation is adding a new product line that willrequire an investment of $138,000. The product line is estimated togenerate net cash flows of $25,000 the first year, $23,000 thesecond year, and $18,000 each year thereafter for ten more years.What is the payback period?
7.26 | ||
5.52 | ||
7.00 | ||
7.67 |
0.625 points
QUESTION 5
Sparky Company invested in an asset with a useful life of 5years. The companys required rate of return is 10% for this classof asset. The net cash flows are estimated to be $7,610 per yearfor the next 5 years and no salvage value is anticipated.
If the asset generates a positive net present value of $2,000,what was the amount of the original investment? (Roundyour answer to the nearest whole dollar. Do not use $signs or commas in recording youranswer. EXAMPLE: If you answer is $22,516,enter your answer as 22516).
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 6
Suppose Whole Foods is considering investing inwarehouse-management software that costs $500,000, has $60,000residual value and should lead to cash cost savings of $130,000 peryear for its five-year life. Determine the NPV of the investment ifmanagement uses a 12% discount rate. (Round to the nearest wholenumber for your final answer. When recording your answer, do notuse $ dollar signs or commas. EXAMPLE: If you answer is $12,251,enter 12251)
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 7
ABC, Corporation is looking to purchase a new piece of equipmentfor $121,505. The equipment has a useful life of 8 years and noexpected salvage value.
The minimum desired rate of return is 10%. ABC is uncertain asto the annual net cash flows the equipment will generate.
What is the minimum annual net cashflow ABC must achieve in order to justify the purchase of this newequipment?
(Round your answer to the nearest whole dollar. Do not use $dollar signs or commas when recording your answer.)
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 8
Sparky Company is considering the replacement of an old machinewith the purchase of a new piece of production equipment that willreduce labor and maintenance costs by $45,000 peryear. If Sparky purchases the new machine, the companywill sell the old equipment for an estimated $20,000 salvage value.Data related to the new machine follows:
InitialInvestment $300,000
UsefulLife 10years
Salvagevalue (newmachine) $30,000
HurdleRate 12%
Assume all cash flows occur at the end of the year and ignoreincome taxes. Calculate the net present value of theinvestment in the new machine. (Round your answer to the nearestwhole dollar. If you have a negative NPV, record youranswer using () parenthesis. EXAMPLE: If yourNPV is ($2,000), enter your answer as (2000).
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
