Question

Question 58 Sage, a large manufacturing company, currently uses a large printing press in its operations and is considering two replacements: the PDX341 and PDW581. The PDX costs $480,000 and has annual maintenance costs of $8,000 for the first 5 years and $13,000 for the next 10 years. After 15 years, the PDX will be scrapped (salvage value is zero). In contrast, the PDW can be acquired for $120,000 and requires maintenance of $26,000 a year for its 10-year life. The salvage value of the PDW is expected to be zero in 10 years. Assuming that Sage must replace its current printing press (it has stopped functioning), it has a 9-percent cost of capital, and all cash flows are after tax, which replacement press is the most appropriate? (Round answers to 2 decimal places, e.g. 125.25.) Chain Replication Approach: NPV of PDX341 + NPV of PDW581 We would prefer Equivalent Annual NPV Approach: Equivalent Annual NPV of PDX341 Equivalent Annual NPV of PDW581 $ We would prefer

Answer 1

Calculating the NPV of both the printing presses:

Year	Cash Flows PDX341($)	Cash Flows PDW581 ($)	PV Factor @ 9%	Present Value PDX341($)	Present Value PDW581 ($)
0	480,000.00	120000	1.0000	480,000.00	120,000.00
1	8,000.00	26,000	0.9174	7,339.45	23,853.21
2	8,000.00	26,000	0.8417	6,733.44	21,883.68
3	8,000.00	26,000	0.7722	6,177.47	20,076.77
4	8,000.00	26,000	0.7084	5,667.40	18,419.06
5	8,000.00	26,000	0.6499	5,199.45	16,898.22
6	13,000.00	26,000	0.5963	7,751.48	15,502.95
7	13,000.00	26,000	0.5470	7,111.45	14,222.89
8	13,000.00	26,000	0.5019	6,524.26	13,048.52
9	13,000.00	26,000	0.4604	5,985.56	11,971.12
10	13,000.00	26,000	0.4224	5,491.34	10,982.68
11	13,000.00	0	0.3875	5,037.93	- 0
12	13,000.00	0	0.3555	4,621.95	- 0
13	13,000.00	0	0.3262	4,240.32	- 0
14	13,000.00	0	0.2992	3,890.20	- 0
15	13,000.00	0	0.2745	3,568.99	- 0
			NPV	565,340.69	286,859.10

So, the NPV of PDX341 is $565340.69

The NPV of PDW581 is $286859.10

Hence, NPV of PDW581 is less it should be chosen.

b). Equivalent Annual NPV =

r * NPV 1-(1+r)-n

- EA NPV of PDX341 =

0.09 + 565340.69 1-(1+0.09)-15

  

0.09 + 565340.69 1-0.2745380

Equivalent Annual NPV of PDX341 = $70135.53

- EA NPV of PDW581 =

0.09 + 286859.10 1-(1+0.09)-15

  
0.09 + 286859.10 1-0.4224108

Equivalent Annual NPV of PDW581 = $44698.41

So, as Equivalent NPV of PDX341 is higher we should choose it.

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