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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=(PVCoa,7,—\)) = 503?
AnﬂuHy 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) /
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,_ ALMCLEAQ A Raf: LR ilCLcc(' 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 straightline
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“ FixeAéSSélﬁ “ , CF Em: A3562” .WQS‘ﬁEs CA. \>. “L“
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 Fall '11
 Mr.Cartoli

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