Question

Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa’s cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa’s controller:  

	A	B
Initial Investment	320,000	454,000
Annual Cash inflows	150,000	160,000
Annual cash outflows	70,000	75,000
Costs to rebuild	120,000	0
salvage value	0	24,000
estimated useful life	8yrs	8yrs

Required:

Calculate NPV. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.)

Option A
	Year	Cashflows	PV factor	present value
			11%
initial investment	0
annual cash flows	1-8
cost to rebuild	4
salvage	8
net present value
Option B
	Year	cashflows	PV Factor	Present value
			11%
initial investment	0
annual cash flows	1-8
cost to rebuild	4
salvage	8
net present value

Answer 1

Computation of NPV of Option A

	Year	Cashflows	PV factor ( 11% )	present value
Initial Investment	0	($320,000)	1	($320,000)
Net Annual cash inflows (150,000-70000)	1-8	$80,000	5.14612	$411,690
Cost to rebuild	4	($120,000)	0.65873	($79,048)
Salvage Value	8	0	0.43393	0
Net Present Value				$12,642

Computation of NPV of Option B

	Year	Cashflows	PV factor ( 11% )	present value
Initial Investment	0	($454,000)	1	($454,000)
Net Annual cash inflows (160,000-75,000)	1-8	$85,000	5.14612	$437,420
Cost to rebuild	4	0	0.65873	0
Salvage Value	8	$24,000	0.43393	$10,414
Net Present Value				($6,166)

Present Value table is used with value upto 5 decimals. Present values are round off to nearest dollars as said in question.