You are working as a finance manager for Fire Fox Transport Ltd. The company is considering to invest in one of the two following projects to buy a new equipment for their storage which is expected to boost the company’s revenue. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9.5%. The cash flows of the projects are provided below. Equipment 1 Equipment 2 Cost $157,000 $182,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 67 000 82 000 78 000 64 000 56 000 83 000 94 000 80 000 77 000 73 000 Required: Identify which option of equipment should the company accept based on Net Present Value (NPV) method? Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 3 years?

You are working as a finance manager for Fire Fox Transport Ltd. The company is considering to invest in one of the two following projects to buy a new equipment for their storage which is expected to boost the company’s revenue. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9.5%. The cash flows of the projects are provided below. Equipment 1 Equipment 2 Cost $157,000 $182,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 67 000 82 000 78 000 64 000 56 000 83 000 94 000 80 000 77 000 73 000 Required: Identify which option of equipment should the company accept based on Net Present Value (NPV) method? Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 3 years?

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 16P: REPLACEMENT CHAIN The Lesseig Company has an opportunity to invest in one of two mutually exclusive...

See similar textbooks

Related questions

Q: Q2. A medium size profitable corporation is considering the purchase of a $5000 truck for use by the…

A: The question is related to Capital Budgeting. The before tax rate of return is calculated with the…

Q: The maintenance expense on a machine is expected to be 52,000 during the first year and to increase…

A: Maintenance expense refers to the total amount of cost incurred by a business entity towards the…

Q: Question 2:Bunnings Ltd is considering to invest in one of the two following projectsto buy a new…

A: Present value is the worth of the future amount in present times that is expected to be received by…

Q: Shirt Corporation is considering purchasing equipment that costs $60,000 and is expected to provide…

A: The Payback period is a period in which project return back the investment amount which is invested…

Q: 1.An initial investment of Rs.8,320 on machinery is expected to generate net cash flows of Rs.3,411…

A: Since you have asked multiple question, we will solve the first question for you. If you want any…

Q: 6. Suppose you purchased equipment and agreed to pay the manufacturer $100,000 in 4 years for the…

A: A concept through which it is studied that the current worth of money is higher than its future…

Q: 2. Write a short memorandum explaining why one financing alternative provides more net…

A: Financial statements: Financial statements are condensed summary of transactions communicated in…

Q: c) The net cash flow for two projects, Coffee Shop and Hair Salon, are as follows: Year Coffee Shop…

A: NPV of cash flows will be its future cash flows discounted to its present value using discount rate,…

Q: Problem 1 Four alternative designs are being considered for a pet-exercising treadmill. The…

A: Internal Rate of Return: This is the tool to estimate the profitability of potential investments.…

Q: mpany purchases the machine, its cost of $276,000 will be financed with a loan at 14.8% interest for…

A: The equipment finance company pays the loan in equal installments which include the principal amount…

Q: Question 2: Bunnings Ltd is considering to invest in one of the two following projects to buy a new…

A: Capital budgeting indicates the evaluation of the profitability of possible investment and projects…

Q: working as a finance manager for Fire Fox Transport Ltd. The company is considering to invest in one…

A: The NPV and Discounted payback period can be calculated as follows :

Q: Question 1 Bunny Businesses makes baskets. Their current machine, Bask-o-matic, has 4 years…

A: For a replacement decision, NPV of incremental cash flow is calculated at the required rate of…

Q: Question 2) A Company is planning to buy a new machinery for 175.000 dollars. This machinery will…

Q: Single Sum, Solving for Other Variables. Two independent situations follow. Solve for the…

A: The question is based on the concept of Financial management. As per the Bartleby guidelines we are…

Q: QUESTION 6 1) "Millie's Ice Cream" Company Limited has two (2) projects under consideration. The…

A: As per bartleby guidelines, "Since you have posted a question with multiple sub-parts, we will solve…

Q: Question 2) Dartis Company is considering investing in a specialized equipment costing $800,000. The…

A: Accounting rate of return = average annual operating income/average initial investment Where…

Q: Exercise 2 (Basic Present Value Concepts) Each of the following parts is independent. (Ignore income…

A: NOTE : As per BARTLEBY guidelines, when multiple questions are given then first question is to be…

Q: Question 3 (4 points) Lady Min Corporation is evaluating the purchase of P500,000 die attach…

A: Solution: Present value factor at IRR = Initial investment / Annual cash inflows = P500,000 /…

Q: New Age Ltd is considering investing in one of the two following projects to buy a new assembly…

A: Interest Rate 9% Salvage Value 0 Time Period (Years) 5 Year Assembly Line 1 Assembly…

Q: Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.…

A: payback period is the time taken by a project to recover its initial cash outlay. Payback period…

Q: Bank ABC Berhad is considering replacing its existing computer system, which was purchased 2 years…

A: 1) The book value of the existing computer system is as follows: Recover period: 5 years Initial…

Q: shows a cash flow diagram for an engineering project. The project has an initial investment of RM…

A: Present value of all cash flow must be equivalent to initial cost to achieve the break even point in…

Q: Payback Period Each of the following scenarios is independent. Assume that all cash flows are…

A: 1. Payback period = Initial Investment / Annual cash inflows =$400000/120000 = 3.33 years 2. Year…

Q: Problem 5. You have to determine an investment strategy for the next three years. At present (time…

A: We define the following decision variables. A: Dollar invested in investment A B: Dollar invested in…

Q: 2. A company determines that the maximum they should pay for a new machine is $46,679. The company…

A: cost of new machinery = $46,679 net cash flow for 7 years= $8,000 per year interest rate = 5%…

Q: Lite-Weight Wheelchair Company has a substantial investment in tubular steel bending equipment. A…

A: Present Worth analysis is the single discounted present value of project's cash flows. It is an…

Q: 1. An initial investment of Rs.8,320 on machinery is expected to generate net cash flows of Rs.3,411…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: 9. Lt. Dan Corporation invested S80,000 in a manufacturing equipment. The salvage value of the asset…

A: The rate of return on investment shows the percentage of return earned by the company on the money…

Q: Question 05: Circe De Solstice is planning to introduce a new show that it plans to run for the next…

A: given, wacc= 18% year cashflow 0 -1000000 1 -200000 2 100000 3 300000 4 500000 5…

Q: QUESTION 4 Abba, Inc is considering the purchase of some new equipment that costs $191100. The new…

A: Introduction: The projected percentage rate of return on investments or an asset in relation to the…

Q: Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.…

A: Payback period = initial investment / Annual cash inflows

Q: 1. Brad Blaylock has purchased a tractor for $96,250. He expects to receive a net cash flow of…

A: Payback period =Total OutflowInflow every year

Q: ABC Company has two projects: A: It is considering to purchase an equipment to be attached with the…

A: Since we answer upto three sub-parts, we shall answer first three. Please resubmit a new question…

Q: 2. A company determines that the maximum they should pay for a new machine is $46,679. The company…

A: The time estimation of cash (TVM) is the idea that cash you have now is worth more than the…

Q: Project 2 Harris Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering…

A: “Since you have posted a question with multiple sub-parts, we will solve first three subparts for…

Q: Problem 3: A company has decided to procure a new piece of equipment worth $24,000 through asset…

Q: Question 2 Mentari Corporation_Sdn. Bhd. requires a new machine. Two companies have submitted bids,…

A: The internal rate of return (IRR) is a capital budgeting metric used to gauge the benefit of…

Q: Payback Period Each of the following scenarios is independent. Assume that all cash flows are…

A: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question and…

Q: What is the payback period for Colby? Round your answer to two decimal places. years 2. What is…

Q: A company estimates that if a certain machine undergoes a major overhaul, its output can be…

A: " Hi, Thanks for the Question. Since you asked multiple question, we will answer first question for…

Q: 2A- The management of Unter Corporation, an architectural design firm, is considering an investment…

A: A. 1. Given Purchase cost of equipment=$432,000 Annual cost savings=$90,000 Life of the equipment=12…

Q: Question 5 Bunnings Ltd is considering to invest in one of the two following projects to buy a…

A: It measures the project attractiveness.

Q: 3. Power Coal Mine Bhd is considering a new mining pit to increase its production output. The…

A: MARR = 10% Time Period of revenues = 15 years Cost for right to mine = 25,000,000 Cost for…

Q: Determine the Net Present Value of the project and advice the company whether to invest in the new…

A: Given We need to calculate the NPV of these cash flows to determine whether to invest in the new…

Question

Question 3

Equipment 1

Equipment 2

Cost

$157,000

$182,000

Future Cash Flows

Year 1

Year 2

Year 3

Year 4

Year 5

67 000

82 000

78 000

64 000

56 000

83 000

94 000

80 000

77 000

73 000

Required:

Identify which option of equipment should the company accept based on Net Present Value (NPV) method?
Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 3 years?

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Inputs

VIEW

Answer 1

VIEW

Answer 2

VIEW

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

REPLACEMENT CHAIN The Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next 8 years. Machine A costs 8.9 million but will provide after-tax inflows of 4.5 million per year for 4 years. If Machine A were replaced, its cost would be 9.8 million due to inflation and its cash inflows would increase to 4.7 million due to production efficiencies. Machine B costs 13.9 million and will provide after-tax inflows of 4.3 million per year for 8 years. If the WACC is 9%, which machine should be acquired? Explain.
Question z You are working as a finance manager for Fire Fox Transport Ltd. The company is considering to invest in one of the two following projects to buy a new equipment for their storage which is expected to boost the company’s revenue. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9.5%. The cash flows of the projects are provided below. Equipment 1 Equipment 2 Cost $157,000 $182,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 67 000 82 000 78 000 64 000 56 000 83 000 94 000 80 000 77 000 73 000 Required: a) Identify which option of equipment should the company accept based on Net Present Value (NPV) method? b) Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 3…
Question 5 Bunnings Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided below. Equipment 1 Equipment 2 Cost $186,000 $195,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 86 000 93 000 83 000 75 000 55 000 97 000 84 000 86 000 75 000 63 000 Required: Identify which option of equipment should the company accept based on Profitability Index? Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 2 years?
answer is 4.3 years Please show your solution MANUALLY. don't use excel or financial calculator. Avalon Inc. is considering a new investment. The initial cost of the machinery is $184,000. Avalon expects the machinery to have a five-year useful life, with a $10,000 salvage value. Annual depreciation expense is computed as $34,800. Annual before-tax operating cash inflows are $67,000. Assume an effective tax rate of 30% and that all cash flows occur evenly throughout the year. Management has set a minimum required return of 12% for similar investments. Compute the discounted payback period in years for the potential investment.
Question 2) Dartis Company is considering investing in a specialized equipment costing $800,000. The equipment has a useful life of 5 years and a residual value of $55,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are given below. Year 1 $200,000 2 150,000 3 260,000 4 95,000 5 95,000 What is the accounting rate of return on the investment?
Question 2 New Age Ltd is considering investing in one of the two following projects to buy a new assembly line. Each option will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9%. The cash flows of the projects are provided below. Assembly Line 1 Assembly Line 2 Cost $386,000 $425,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 136 000 213 000 283 000 215 000 175 000 197 000 184 000 186 000 265 000 263 000 Required: Identify which option of assembly line the company should accept based on the NPV method (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) Identify which option of assembly line the company should accept based on the Profitability Index method.
Question 1 You currently work at Happy home Construction company The government offered the company 4 projects to undertake in building houses Management is trying to select the best investment from among these alternative independent projects. Each alternative involves an initial outlay of $160,000 and a 10% cost of capital. Management requires that all project investments should be recovered in 4 years. Their cash flows are as follows: Year Kinstown St Christina St Thomp St Bess 1 60,000 40,000 41,000 0 2 50,000 60,000 41,000 60,000 3 40,000 0 41,000 0 4 30,000 40,000 41,000 56,000 5 20,000 20,000 41,000 50,000 6 8,000 60,000 0 80,000 1a. Calculate each project’s Payback Period. 1b. Based on the payback periods, which project(s) should they accept if the project(s) are independent. 1c. Which project(s) should they accept if the projects are mutually exclusive? PLEASE DO QUESTION 1…
QUESTION 2 One of the reports submitted by the infrastructure development team revealed the following Year 0 1 2 3 4 Cashflows A -R 210000 ,R15000 ,R 30000 , R 30 000 ,R 370000 Cashflow B -R 21000 , R11000 ,R 9000, R11000, R 9000 Suppose you require a 15 per cent return on investment. 2.1 Using the discounted payback period which investment would you choose and why? 2.2 If you apply the NPV rule which investment, will you choose and why? 2.3 Based on the provided answers which project would you finally choose and why? All parts correctly pls with explanation thanks!
Question 2) A Company is planning to buy a new machinery for 175.000 dollars. This machinery will create cash inflows in a five-year period (economic life) as follows. There is no expected salvage value of machinery at the end its economic life. 1 50.000 dollars 2 60.000 3 65.000 4 40.000 5 30.000 a) Calculate the pay back period. b) Calculate the net present value (Assume the discount rate of the company is 10%) c) Make your decision and explain: Why? Present value of 1 dollar Period Discount rate (10%) 1 0,909 2 0,826 3 0,751 4 0,683 5 0,621
Question 1Real Estate Ltd is considering investing in property development, which requires an initial investment of £130,000. The annual cash inflows during years 1-3 are expected to be £40,000 for year 1; £45,000 for year 2 and £52,000 for year 3. The company’s money cost of capital is 6% and inflation is expected to be 3% during the life of the project. Required: a) Calculate the ARR of the project, taking inflation into account. b) Calculate the (Undiscounted) Payback Period of the project, taking inflation into account. c) Calculate the NPV of the project using the money cost of capital as the discount rate, and state clearly whether the project should be undertaken. d) Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places), and state clearly whether the project should be undertaken.e) Discuss the likely impact of your results in parts c) and d) above on Real Estate Ltd.
123 Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $1,550,000 and will last 10 years. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $180,000. She estimates that the return from owning her own shop will be $55,000 per year. She estimates that the shop will have a useful life of 6 years. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a…
Question 1 : Assume you are the finance manager of Almanor Company , and the company is considering investing in one of the three projects . The life for both the Projects X , M and Project Y is 5 years . Project X costs OMR . 20500 , Project M costs OMR . 20500 and Project Y costs OMR.20500 . The discount rate / cost of capital is 4.15 % . Required : Use the following techniques to help company to decide which Machine is better and justify why ? A) Payback period B) Discount payback period C) Net Present Value D) Present value index -Profitability index. Year Project X Project M Project Y 1 7865 3748 8752 2 4567 7609 8393 3 9676 4628 4508 4 7292 8905 7836 5 9900 9904 8287