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 AOption BInitial investment$320,000 $454,000 Annual cash inflows 150,000 160,000 Annual cash outflows 70,000 75,000 Costs to rebuild 120,000 0 Salvage value 0 24,000 Estimated useful life 8years 8years 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 "Present Values" to the nearest whole dollar amount.)

The Net Present value is calculated with the help of following formula Net Present Value = Present…

Answered: Tulsa Company is considering investing…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 10E: Roberts Company is considering an investment in equipment that is capable of producing more...

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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 cash inflows		150,000			160,000
Annual cash outflows		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 "Present Values" to the nearest whole dollar amount.)

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