Question

Cleveland Cove Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to​ two: the B14 Model and the F54 Model. Financial data about the two choices follows. ​(For the B14​ Model, the present value for this scenario is

0.322

and the present value of annuity is

5.65

For the F54​ Model, the present value for this scenario is

0.322

and the present value for annuity is

5.65

	B14 Model	F54 Model
Investment	$330,000	$160,000
Useful life​ (years)	10	10
Estimated annual net cash inflows for useful life	$80,000	$30,000
Residual value	$50,000	$6,000
Depreciation method	Straight−line	Straight−line
Required rate of return	12​%	12​%

Using the net present value​ model, which alternative should the company​ select?

Answer 1

B14 Model.

Calculating Net Present Value.

>> Net Present Value = Present value of future cash inflows - Initial investment.

>> Net Present Value = [($ 80,000 * PVIFA(12%, 10 years) )+ ( $ 50,000 * PVIF(12% , 10 years ))] - ( $ 330,000 ).

>> Net Present Value = ($ 80,000 * 5.65) + ( $ 50,000 * 0.322 ) - ( $ 330,000 ).

>> Net Present Value = $ 138,100.

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F54 Model.

Calculating Net Present Value.

>> Net Present Value = Present value of future cash inflows - Initial investment.

>> Net Present Value = [($ 30,000 * PVIFA(12%, 10 years) )+ ( $ 6,000 * PVIF(12% , 10 years ))] - ( $ 160,000 ).

>> Net Present Value = ($ 30,000 * 5.65) + ( $ 6,000 * 0.322 ) - ( $ 160,000 ).

>> Net Present Value = $ 11,432.

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>>> From above, we can say B14 Model is better. Because Net Present Value of B14 Model is more than F54.