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op X Company is considering replacing one of its machines in order to save operating costs. Operas current machine are $65,000 per year; operating costs with the new machine machine will ti operating costs with the new machine are expected to be $42.000 per year. The new achine will cost $69,000 and will last for six years, at which time it can be sold for $2,500. The current m last for six more years but will not be worth anything at that time. It cost $33,000 three years ago only $5,000. Assuming a discount rate of 7%, what is the incremental net present value of replacing the with the new machine? 9. AO $35,568 BO $47,306 CO $62.917 DO $83,680 EO $111.294 FO $148,021 sold for $2,500. The current machine will also $33,000 three years ago but is currently worth resent value of replacing the current machine ° Company is planning to launch a new product. A market research study, costing $190,000, was conducted last year, indicating that the product will be successful for the next ng that the product will be successful for the next four years. Profits from sales of the product are expected to be $168,000 in each of the first two years and $104.000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $83,000. New manufacturing equipment will have to be purchased to $320,000; it will have zero disposal value at the end of the four years. Assuming a discount rate of 7%, what is the net present value of launching the new product? 10. AO $34,666 BO $40,559 CO $47,454 DO $65,521 EO $64,960 FO $76,003 8pt X Company must replace one of its current machines with either Machine A or Machine B. The useful life of both machines is seven years. Machine A costs $52,000, and Machine B costs $60,000. Estimated annual cash flows with the two machines are as follows: Year Machine A Machine B S-6,000 S-7,000 -8,000 -4,000 -8,000 -3,000 -8,000 -3,000 -6,000 -3,000 -5,000 -2,000 -4,000 -2,000 If X Company buys Machine B instead of Machine A, what is the payback period (in years)? 11. AO2 BO 3 CO 4 DO 5 EO 6 FO7

Answer 1

Solution Question #9 Computation of incremental Net present value of the new machine Incremental Net Present Value Years Amount Present Value Present Value factor @ 7% 0 ($ 64,000) 1 ($ 64,000) Incremental Cost of Machine ($69,000 - $5,000) $23,000 4.767 $109,641 Incr. Operating cost savings ($65,000 - $42,000) $2,500 0.666 $1,665 Incremental salvage value ($2,500 - $0) Incremental Net Present Value $47,306 The correct option is, B. $47,306 Question # 10 Computation of Net present value of launching the new product Incremental Net Present Value Years Amount Present Valuel. Present Value factor @ 7% ($83,000) ($320,000) ($83,000) ($320,000) 1 Cost of advertising compaign Cost of new manuf. Equipment Profits from sale of product Year 1 Year 2 Year 3 Year 4 $168,000 $168,000 $104,000 $104,000 0.935 0.873 0.816 0.763 $157,080 $146,664 $84,864 $79,352 Net present value of launching the new product $64,960 Note: Cost of market research study is a sunk cost and hence will not impact NPV calculation. The correct option is, E. $64,960