Question

Cuomo Machinery Company must choose between two machines, Machine A and Machine B, and the company...

Cuomo Machinery Company must choose between two machines, Machine A and Machine B, and the company can only choose one machine. The company plans to replace the machine when it wears out on a perpetual basis, NOT for one-time use. • Machine A costs $40,000 now and will last for three years. It will require an aftertax cost of $10,000 per year after all relevant expenses. • Machine B costs $5,000 now and will last for four years. The after-tax cost of Machine B will be $20,000 per year after all relevant expenses. • All cash flows occur at the end of the year. The discount rate is 10 percent for the company. Ignore depreciation. [Note: You may use PV and PVA equations or PV and PVA tables to answer this question. However, you are required to show all detailed steps and computations clearly and make sure that the signs (positive/negative) of all cash flows are correct.]

(a) What are the net present values for Machine A and Machine B (NPVA and NPVB)?

(b) What are the equivalent annual costs for Machine A and Machine B (EACA and EACB)?

(c) Which machine (Machine A or Machine B) should the company choose? Explain your choice in one sentence.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a) & b)

Machine A Machine B
Initial Cashflow -$40,000.00 -$5,000.00
Annual Cashflow -$10,000.00 -$20,000.00
Life 3 4
PV of Annual Cashflows(WN1) -$24,868.52 -$63,397.31
NPV -$64,868.52 -$68,397.31
EAC -$26,084.59 -$21,577.35

WN1: Calculation of Present Value of Cash flow:

Annuity Discount Factor of Machine A = (1-((1+0.1)^(-3)))/0.1=2.48685

PV of cashflow of Machine A = 2.48685 * 10000 = 24,868.52

Annuity Discount Factor of Machine B = (1-((1+0.1)^(-4)))/0.1 = 3.16986

PV of cashflow of Machine B = 3.169865 * 20000 = 63,397.31

c) Cuomo Machinery Company should choose Machine A, because it's NPV is more than Machine B.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs...
Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs $1,600 and will last for 3 years. The copier will require a real aftertax cost of $190 per year after all relevant expenses. The RH45 costs $2,100 and will last 4 years. The real aftertax cost for the RH45 will be $165 per year. All cash flows occur at the end of the year. The inflation rate is expected to be 5 percent per...
A company is considering buying either Machine A or Machine B. Machine Both machines cost $46,629,...
A company is considering buying either Machine A or Machine B. Machine Both machines cost $46,629, but Machine A is expected to last 4 years and generate cash flows of $19,528 each year, while Machine B is only expected to last 2 years, but generate cash flows of $34,711 each year. If the WACC is 10%, which machine is the best investment? Calculate the RELEVANT NPV of each investment project, then obtain the difference. That is, enter the NPV of...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,030,000 and will last for 4 years. Variable costs are 38 percent of sales, and fixed costs are $162,000 per year. Machine B costs $4,770,000 and will last for 7 years. Variable costs for this machine are 28 percent of sales and fixed costs are $90,000 per year. The sales for each machine will be $9.54 million per year. The required return...
Rockyford Company must replace some machinery that has zero book value and a current market value...
Rockyford Company must replace some machinery that has zero book value and a current market value of $3,600. One possibility is to invest in new machinery costing $58,000. This new machinery would produce estimated annual pretax cash operating savings of $23,200. Assume the new machine will have a useful life of 4 years and depreciation of $14,500 each year for book and tax purposes. It will have no salvage value at the end of 4 years. The investment in this...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,240,000 and will last for 5 years. Variable costs are 35 percent of sales, and fixed costs are $147,000 per year. Machine B costs $4,360,000 and will last for 9 years. Variable costs for this machine are 31 percent of sales and fixed costs are $109,000 per year. The sales for each machine will be $8.72 million per year. The required return...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,200,000 and will last for 7 years. Variable costs are 35 percent of sales, and fixed costs are $154,000 per year. Machine B costs $4,630,000 and will last for 10 years. Variable costs for this machine are 27 percent of sales and fixed costs are $127,000 per year. The sales for each machine will be $9.26 million per year. The required return...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,140,000 and will last for 7 years. Variable costs are 33 percent of sales, and fixed costs are $175,000 per year. Machine B costs $4,220,000 and will last for 10 years. Variable costs for this machine are 30 percent of sales and fixed costs are $108,000 per year. The sales for each machine will be $8.44 million per year. The required return...
Vandelay Industries is considering the purchase of a new machine for producing latex. Machine A costs...
Vandelay Industries is considering the purchase of a new machine for producing latex. Machine A costs $2,600,000 and will last for six years. Variable costs are 35% of sales and fixed costs are $195,000 per year. Machine B costs $5,200,000 and will last for 9 years. Variable costs for this machine are 30% of sales and fixed costs are $230,000 per year. The sales for each machine will be $10 mil per ear. The required return is 10% and the...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,170,000 and will last for 8 years. Variable costs are 40 percent of sales, and fixed costs are $165,000 per year. Machine B costs $4,370,000 and will last for 12 years. Variable costs for this machine are 32 percent of sales and fixed costs are $100,000 per year. The sales for each machine will be $8.74 million per year. The required return...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine...
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $1,810,000 and will last for 4 years. Variable costs are 34 percent of sales, and fixed costs are $147,000 per year. Machine B costs $4,380,000 and will last for 7 years. Variable costs for this machine are 30 percent of sales and fixed costs are $77,000 per year. The sales for each machine will be $8.76 million per year. The required return...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT