Unformatted text preview: ent required rate of return of 20%? Show computations, and assume no and they taxes. Answer: Present value of keeping current system: Predicted Cash Flows Year(s) PV Factor $(40,000) 0 1.000 (70,000) 15 2.991 5,000 5 0.402 PV of Cash Flows Overhaul Annual operations Salvage value Net present value Present value of new system: Investment Salvage value, old Annual operations Salvage value Net present value Buying the new equipment is the most desirable by $55,760 ($247,360 $191,600). Predicted Cash Flows Year(s) PV Factor $(100,000) 0 1.000 20,000 0 1.000 (40,000) 15 2.991 20,000 5 0.402 PV of Cash Flows Diff: 3 Terms: net present value (NPV) method Objective: 3 AACSB: Analytical skills 112) Maremou follows: nt Tire Company Current Machine New Machine needs to Purchase Price, New $112,500 $148,000 overhaul Current book value 33,500 its auto Overhaul needed now 27,500 lift system Annual cash operating costs 63,000 48,000 or buy a Current salvage value 40,000 new one. Salvage value in five years 8,000 35,000 The facts have been Required: gathered, and they Which alternative is the most desirable with a current required rate of return of 15%? Show computations, and assume no are as taxes. Answer: Present value of keeping current system: Predicted Cash Flows Year(s) PV Factor $(27,500) 0 1.000 (63,000) 15 3.352 8,000 5 0.497 PV of Cash Flows Overhaul Annual operations Salvage value Net present value Present value of new system: Investment Salvage value, old Annual operations Salvage value Net present value Overhauling the existing system is the most desirable by $16,801 [$(234,700)  $(251,501)]. Predicted Cash Flows Year(s) PV Factor $(148,000) 0 1.000 40,000 0 1.000 (48,000) 15 3,352 35,000 5 0.497 PV of Cash Flows Diff: 3 Terms: net present value (NPV) method Objective: 3 AACSB: Analytical skills 113) ABC Boat improved model. The old machine has a salvage value of $20,000 now and a predicted salvage value of $4,000 in six Company years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $40,000. is interested The n...
View
Full Document
 Spring '10
 ALL
 Accounting, Cost Accounting, Net Present Value, The Bible, AACSB, Reflective thinking, Capital Budgeting

Click to edit the document details