17. Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $220,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $97,000 per year; and Machine 360-6, which has a cost of $320,000, a 6-year life, and after-tax cash flows of $93,400 per year. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Filkins's cost of capital is 12%.
Calculate the two projects' extended NPVs. Do not round intermediate calculations. Round your answers to the nearest dollar.
Machine 190-3: $__
Machine 360-6: $__
Should the firm replace its old knitting machine? If so, which new machine should it use?
The firm (Select one)
By how much would the value of the company increase if it accepted the better machine? Do not round intermediate calculations. Round your answer to the nearest dollar.
$__
What is the equivalent annual annuity for each machine? Do not round intermediate calculations. Round your answers to the nearest dollar.
Machine 190-3: $ __
Machine 360-6: $ __
18. The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 13%, and the projects' expected net costs are listed in the following table:
Expected Net Cost |
||||
Year |
Conveyor |
Forklift |
||
0 |
-$500,000 |
-$200,000 |
||
1 |
-120,000 |
-160,000 |
||
2 |
-120,000 |
-160,000 |
||
3 |
-120,000 |
-160,000 |
||
4 |
-120,000 |
-160,000 |
||
5 |
-20,000 |
-160,000 |
The IRR of alternative 1 is (Select one from below) undefined 11% 13% 15%
The IRR of alternative 2 is (Select one from options below)
undefined 11% 13% 15%
Alternative 1: $__
Alternative 2: $__
Which method should be chosen? (select one)
IRR method or PV method
17 MACHINE 190-3:
Calculate present value of cash inflows : We are given that the after tax cash flows of 97,000 are constant every year, that is, it is in the form of annuity. Therefore in order to find the present value of cash inflows, we multiply the cash flows by present value annuity factor (PVIFA) at 12% for 3 years.
Present value of cash inflows = 97,000 * PVIFA12%,3years
= 97,000 * 2.40
= $232800
STEP 2: Calculate NPV
NPV = Present value of cash inflows - Initial investment
= 232800 - 220,000 = $12,800
MACHINE 360-6
NPV = (93400 * PVIFA12%,6years) - 320,000
= (93400 * 4.11) - 320,000
= 383874 - 320,000
= $63784
Machine 360-6 would be accepted, since it has a higher NPV
If this machine is accepted, the value will increase by 63784 - 12800 = $50,984
Answer c
The equivalent annual net present value is determined by dividing the NPV of cash flows of the project by the annuity factor corresponding to the life of the project at the given cost of capital.
18
IRR is defined at the rate at which NPV of the project is zero.The IRR can be calulated as follows
year | conveyor | forklift |
0 |
- 500000 | -200000 |
1 | 120000 | 160000 |
2 | 120000 | 160000 |
3 | 120000 | 160000 |
4 | 120000 | 160000 |
5 | 20000 | 160000 |
0 % |
75% |
The IRR of conveyor is 0 % and of forklift is 75% . Hence thev IRR is undefined for both conveyor and forklift.
NPV of Conveyor = (-120000 * PVIFA13%,4years + -20000*PVF 13%,5) - 500000 = -$867260
NPV of forklift = (-160000* PVIFA13%,5years) - 200000 = - $762757
NPV method must be chosen .
Get Answers For Free
Most questions answered within 1 hours.