Question

Pete's Precision Presses is considering purchasing a new press for $200,000. | ||||||

The press will save the company $60,000 per year in production costs for 7 years. | ||||||

After 7 years the press will have a value of $50,000. | ||||||

Depreciation is calculated over 7 years using straight-line. | ||||||

1. Calculate the Payback Period | ||||||

Should the company buy the press if its minimum ARR is 20%? | ||||||

3. Calculate the Net Present Value (NPV) of the press using 15% interest. | ||||||

Should the company buy the press using NPV? |

Answer #1

P10–10 NPV: Mutually exclusive
projects Hook Industries is considering the
replacement of one of its old metal stamping machines. Three
alternative replacement machines are under consideration. The
relevant cash flows associated with each are shown in the following
table. The firm’s cost of capital is 15%.
Machine A
Machine B
Machine C
Initial investment
(CF0)
−$85,000
−$60,000
−$130,000
Year (t)
Cash inflows (CFt)
1
$18,000
$12,000
$50,000
2
18,000
14,000
30,000
3
18,000
16,000
20,000
4
18,000
18,000
20,000
5
18,000...

Herky Foods is considering acquisition of a new wrapping
machine. By purchasing the machine, Herky will save money on
packaging in each of the next 5 years, producing the series of
cash inflows shown in the following table:
1 371,200
2 348,000
3 278,400
4 324,800
5 185,600
The initial investment is estimated at $1.161.16 million.
Using a
88%
discount rate, determine the net present value (NPV) of the
machine given its expected operating cash inflows. Based on the
project's...

Access Part II of the IG009 Assessment Scenarios document. As
the new product development manager, you are considering investment
proposals for two mutually exclusive investment opportunities. The
two proposals must be evaluated using net present value (NPV),
accounting rate of return (ARR), internal rate of return (IRR), and
payback. Review the cash flow information in the “Investments”
section of the Assessment Scenarios document, and then analyze the
investment proposals using Excel or another spreadsheet software to
calculate NPV, ARR, IRR,...

Henry Press is
considering purchasing a printing machine for £10,000 on 31
December 2021, on the last day of its financial year end. The
machine generates cash flows of £7,000 per annum and will be sold
for £2,000 on 31 December 2023. The company pays tax at 17% and
capital allowances are available at 18% per annum on a reducing
balance basis.
The expected returns
on the stock market are 12% and the Bank of England base rate is
200...

Hook Industries is considering the replacement of one of its old
metal stamping machines. Three alternative replacement machines are
under consideration. The relevant cash flows associated with each
are shown in the following table: LOADING.... The firm's cost of
capital is 12%
Machine A
Machine B
Machine C
Initial investment
85100
60000
129800
Year
Cash Flows
1
18300
12500
49500
2
18300
13900
30200
3
18300
15800
20500
4
18300
17900
20500
5
18300
19800
19600
6
18300
25500
30000...

A firm is considering investing in a project that requires an
initial investment of $200,000 and is expected to produce cash
inflows of $60,000, $80,000, and $100,000 in first, second, and
third years. There will be no residual value.
The firm applies a discount rate of 10%.
Discount factors for Year 1, 2 and 3 are 0.909, 0.826, and 0.751
respectively.
Required:
i) Calculate the NPV of the project.
ii) Explain the meaning of NPV and its advantages as an...

A firm is considering investing in a project that requires an
initial investment of $200,000 and is expected to produce cash
inflows of $60,000, $80,000, and $100,000 in first, second, and
third years. There will be no residual value.
The firm applies a discount rate of 10%.
Discount factors for Year 1, 2 and 3 are 0.909, 0.826, and 0.751
respectively.
Required:
i) Calculate the NPV of the project.
ii) Explain the meaning of NPV and its advantages as an...

Linkin Corporation is considering purchasing a new delivery
truck. The truck has many advantages over the company’s current
truck (not the least of which is that it runs). The new truck would
cost $55,900. Because of the increased capacity, reduced
maintenance costs, and increased fuel economy, the new truck is
expected to generate cost savings of $8,600. At the end of 8 years,
the company will sell the truck for an estimated $27,000.
Traditionally the company has used a rule...

The company "ABCD" is considering to make a new investment by
purchasing a new machine for the production of a new product. For
the new machine, "ABCD" must spend 6,000 euros, which will be sold
after six years. Each year, the machine has 200 euros operating
costs. The beneficial/useful life span of the machine is 6 years
and its residual (salvage) value is zero.
YEAR
INCOME THE MACHINE GENERATES (in euros)
1
800
2
1,200
3
1,800
4
2,700
5...

Question 1: Evaluating investment
projects
You are planning to invest $50,000 in new equipment. This
investment will generate net cash flows of $30,000 a year for the
next 2 years. The salvage value after 2 years is zero. The cost of
capital is 25% a year.
a) Compute the net present value
NPV = $
Enter negative numbers with a minus sign, i.e., -100 not ($100)
or (100).
Should you invest? Why?
YES -- the NPV is positive, which indicates...

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