Option A: Year Cash Flows PV factor Present Value 11% Initial Investment Annual Cash Flows 1-8 Cost to Rebuild 4 Salvage 8. Net Present Value Option B: Year Cash Flows PV factor Present Value 11% Initial Investment Annual Cash Flows 1-8 Cost to Rebuild 4 Salvage Net Present Value Option A $ 320,000 Option B $ 454,000 Initial investment Annual cash inflows 150,000 70,000 120,000 160,000 75,000 Annual cash outflows Costs to rebuild Salvage value Estimated useful life 24,000 8 years 8 years
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. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.)
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