Calculating the annuity factors

Calculating the annuity factors - 2 The company is choosing...

Info icon This preview shows pages 1–2. Sign up to view the full content.

Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 2. The company is choosing between machine A and B (they are mutually exclusive and the company can only pick one). The initial cost of machine A is $300,000 and it will last for 7 years before it needs to be replaced. The cost of operating machine A I each year is $50,000. The initial cost of Machine B is $180,000 and it will last for 5 years before it needs to be replaced. The cost of operating machine B is $70,000 in cash flow per year. If the required rate of return is 9%, .m (a) Calculate the 7 year and 5 year annuit5 factors at 9% annual interest. Ammly Fania? A=(PVC-oa,7,—\)) = 5-03? AnfluH-y FodofiA =(pvéoq’ 51,- 1)) :2 3.3807 (b) Using the annuity factors, find the PV of Machine A and Machine B including all costs (initial + operating). MM. = -300,ooo {5.0350 x 50; 000) g _ ,M PVA :35 51, 614 7‘ (5”, MW, '4 430,0.11 (.6 «L17 x 70 011;) MPVe 3&1501, SL’ISEQ (c) Which machine is a better choice for the company after considering the different lives of the projects? (Note: be sure to use the equivalent annual annuity method) / LEI/02013463 Ap_§"i“cj\‘= A‘f‘v‘t‘l‘; v :: pryflmfiy 5.3.01. C,“- T" [AA A ’”\ :51 :e f4” q - ,. , EAAF: me, A la . all ~ ‘: ' \' "..- ,L, .ictiu‘ ,_ ALMCLEAQ A Raf: LR ilC-Lcc(' EAR SC- ‘1' [:3 0‘ L6H! C C 3. BMT has developed a new product. It can go into production for an initial investment of $5,000,000. The equipment will be depreciated using straight-line depreciation over 4 years to a value of zero. The firm believes that net working capital at each date will equal 20 percent of next year’s forecast sales. The firm estimates that variable costs are equal to 45% of sales and fixed costs are $400,000 per year. Sales forecasts in dollars are below. The project will come to an end after 4 years, when the product becomes obsolete. The firm’s tax rate is 35 percent, and the discount rate is 8 percent. Calculate the NPV. Year 0 1 2 3 4 . \ Sales forecast (m S): 0 3,000,000 3,500,000 4,000,000 4,500,000 Inwflmenfs E“ FixeAéSSé-lfi “ , CF Em: A3562” .WQS‘fiE-s CA. \>. “L“ ETV'éé‘K‘“§C5§‘E'i<*}_women,“ . "CW???“‘;-:’mk‘na(cr§°"?‘fi\7 ' ~ ‘ . ,”&N§$K'_x3<:sr?§e¥, Opes-«Honé jig-Eve 0}," (if, "(\i :‘3‘ - 4 law ”Tum: —_ a- ._ . t; t‘ ‘ ‘ ‘H’om R‘." E CEPeax‘ ions Ramsay“, .. T044 Qrgjgci Cask Flow , 7 Mali PYQSQIH‘ Value O-UAEX lhpudj 515a». hi; Rafi Tax. my 7 072‘s ,7 _ ...
View Full Document

  • Fall '11
  • Mr.Cartoli

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern