Tax Savings 12500 1 12 034 4250 24056 3 3Work Cap 10000 None 10000 10000 4Work

Tax savings 12500 1 12 034 4250 24056 3 3work cap

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Tax Savings + 12,500 1-12 0.34 + 4,250 + 24,056 3
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3)Work. Cap. - 10,000 0 None - 10,000 - 10,000 4)Work. Cap. + 10,000 12 None + 10,000 + 2,076 5)Loss on Disposal + 16,000 0 0.34 + 5,440 + 5,440 6)ITC + 10,500 0 None + 10,500 + 10,500 6)Labor Savings + 24,000 1-12 0.66 + 15,840 4
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+ 89,659 7)Maintenance Savings + 6,000 1-12 0.66 + 3,960 + 22,415 8)Salvage + 10,000 12 0.66 + 6,600 + 1,370 -$ 4,484 F. Decision: Since both alternatives have (-)NPV's, should both be rejected? No! We have not included the common cash flows to these alternatives, e.g., the revenue stream from coupling sales which is presumed to be the same for both alternatives. However, absent the total revenue and cost information, we cannot say for sure Coleman should stay in the coupling business. We can only say that if they do stay in this business, the new equipment is the better way to manufacture couplings. 5
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How much are the shareholders better off with the new equipment alternative? Instead of bearing -$26,551 in present value impact for the overhaul option, they will absorb -$4,484 in present value reduction with the new equipment. Therefore, the net wealth increase for the shareholders is +$22,067 with the new equipment versus the overhaul decision. Also, the qualitative ("soft") factors unanimously favor the new equipment, e.g., less space is consumed, a higher capacity exists if greater sales materialize, and the graveyard shift is eliminated. This observation reinforces the conclusion drawn with the "hard" data used in the analysis.
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