Question

# Tulsa Company is considering investing in new bottling equipment and has two options: Option A has...

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

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.

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