Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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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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