Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa’s cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa’s controller: Option A Option B Initial investment $ 320,000 $ 454,000 Annual cash inflows 150,000 160,000 Annual cash outflows
Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa’s cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa’s controller: Option A Option B Initial investment $ 320,000 $ 454,000 Annual cash inflows 150,000 160,000 Annual cash outflows
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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Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa’s cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa’s controller:
| Option A | Option B | |||||
| Initial investment | $ | 320,000 | $ | 454,000 | ||
| Annual |
150,000 | 160,000 | ||||
| Annual |
70,000 | 75,000 | ||||
| Costs to rebuild | 120,000 | 0 | ||||
| Salvage value | 0 | 24,000 | ||||
| Estimated useful life | 8 | years | 8 | years | ||
Required:
Calculate NPV for both options. (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your "
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