Tim's Corp. is considering whether to overhaul an older machine or buy a newer more efficient machine. They have asked you to 'run the numbers' based on revenue and cost information generated by engineering and finance departments. The new machine will allow Tim's to introduce a new variation of their product resulting in an additional projected revenue stream. Tim's requires an 18% rate of return. Projected revenue and cost information is as follows: Keep Old Machine New Machine Cost of old machine 112,000 Cost of the new machine 300,000 Overhaul costs 150,000 Salvage value old machine 25,000 Annual Revenues 95,000 Salvage value of new machine 30,000 Operating costs 42,000 Annual Revenues - Base Product 95,000 Salvage value in Year 5 10,000 Annual Revenues - New Product 10,000 Operating costs 32,000 Additional information: Both machines will operate for 5 years at which time they will be sold for their respective estimate salvage value. The old machine will be overhauled and remain in service for 5 years. The new machine: is operationally more efficient and operates at a lower cost. Allows Tim's to introduce a new variation of their based product resulting in additional projected revenues. *Annual revenues will start at $10,000 in year 1 and increase $10,000 each year thereafter. Tim's requires an 18% rate of return on capital projects. Required: Determine the Net Present Value of both alternatives Which alternative would you recommend based strictly on NPV analysis?
Tim's Corp. is considering whether to overhaul an older machine or buy a newer more efficient machine. They have asked you to 'run the numbers' based on revenue and cost information generated by engineering and finance departments. The new machine will allow Tim's to introduce a new variation of their product resulting in an additional projected revenue stream. Tim's requires an 18% rate of return. Projected revenue and cost information is as follows: Keep Old Machine New Machine Cost of old machine 112,000 Cost of the new machine 300,000 Overhaul costs 150,000 Salvage value old machine 25,000 Annual Revenues 95,000 Salvage value of new machine 30,000 Operating costs 42,000 Annual Revenues - Base Product 95,000 Salvage value in Year 5 10,000 Annual Revenues - New Product 10,000 Operating costs 32,000 Additional information: Both machines will operate for 5 years at which time they will be sold for their respective estimate salvage value. The old machine will be overhauled and remain in service for 5 years. The new machine: is operationally more efficient and operates at a lower cost. Allows Tim's to introduce a new variation of their based product resulting in additional projected revenues. *Annual revenues will start at $10,000 in year 1 and increase $10,000 each year thereafter. Tim's requires an 18% rate of return on capital projects. Required: Determine the Net Present Value of both alternatives Which alternative would you recommend based strictly on NPV analysis?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Tim's Corp. is considering whether to overhaul an older machine or buy a newer more efficient machine. They have asked you to 'run the numbers' based on revenue and cost information generated by engineering and finance departments. The new machine will allow Tim's to introduce a new variation of their product resulting in an additional projected revenue stream. Tim's requires an 18%
| Keep Old Machine | New Machine | ||
| Cost of old machine | 112,000 | Cost of the new machine | 300,000 |
| Overhaul costs | 150,000 | Salvage value old machine | 25,000 |
| Annual Revenues | 95,000 | Salvage value of new machine | 30,000 |
| Operating costs | 42,000 | Annual Revenues - Base Product | 95,000 |
| Salvage value in Year 5 | 10,000 | Annual Revenues - New Product | 10,000 |
| Operating costs | 32,000 |
Additional information:
- Both machines will operate for 5 years at which time they will be sold for their respective estimate salvage value.
- The old machine will be overhauled and remain in service for 5 years.
- The new machine:
- is operationally more efficient and operates at a lower cost.
- Allows Tim's to introduce a new variation of their based product resulting in additional projected revenues. *Annual revenues will start at $10,000 in year 1 and increase $10,000 each year thereafter.
- Tim's requires an 18% rate of return on capital projects.
Required:
- Determine the
Net Present Value of both alternatives - Which alternative would you recommend based strictly on NPV analysis?
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