Question

8 pt X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $62,000 per year: Operating costs with the new machine are expected to be $43,000 per year. The new machine will cost $70,000 and will last for four years, at which time it can be sold for $1,000. The current machine will also last for four more years but will not be worth anything at that time. It cost $31.000 three years ago but is currently worth only $7,000. Assuming a discount rate of 5%, what is the incremental net present value of replacing the current machine with the new machine? 9. AO $1,249 BO $1,661 CO $2,209 DO $2,938 EO $3,908 FO $5,197 8 pt X Company is planning to launch a new product. A market research study, costing $200,000, was conducted last year, indicating that the product will be successful for the next four years. Profits from sales of the product are expected to be $152,000 in each of the first two years and $118,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $91,000. New manufacturing equipment will have to be purchased for $390,000; 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 $14,509 BO 8-16,976 CO 8-19.862 DO S-23,239 EO S-27,189 FO S-31,811 pt 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 $51,000, and Machine B costs $54.000. 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 -3,000 -6,000 -3,000 -5,000 -2,000 -4,000 -2,000 -8,000 IF X Company buys Machine B instead of Machine A, what is the payback period in years)? 11. AO 2 BO 3 CO 4 DO 5 EO 6 FO7

Answer 1

0 year amount table factor present value cost of new machine $ 70,000 1.000 $70,000 salvage value of old machine $ 7,000 1.000 $7,000 savings in annual operating costs $ 19,000 3.546 $ 67,374 salvage value of new machine $1,000 0.823 $ 823 net present value of replacing the current machine with new machine = $5,197 hence, the correct answer is F $5,197

10 year amount advertisement campaign -$ 91,000 cost of manufacturing equipment -$ 390,000 $ 152,000 $ 152,000 profits $ 118,000 profits $ 118,000 net present value of launching the new product = profits profits table factor present value $ 91,000 $ 390,000 0.935 $ 142,120 $ 132,696 0.816 $ 96,288 0.763 $ 90,034 $ 19,862 hence, the correct answer is C$-19,862

year machine A machine B incremental cash flow -$ 6,000 -$ 8,000 -$ 8,000 -$ 8,000 $6,000 $5,000 $4,000 $ 7,000 -$ 4,000 -$3,000 -$3,000 -$3,000 -$2,000 $2,000 -$1,000 $ 4,000 $5,000 $5,000 $3,000 $3,000 $2,000 cumulative incremental cash flow -$1,000 $3,000 $ 8,000 $ 13,000 $ 16,000 $ 19,000 $21,000 extra cost in machine B = $54,000 - $51,000 = $3,000 from the cumulative incremental cash flow column, the extra cost of $3,000 is recovered at the end of 2 years. Hence, the payback period is 2 years. hence, the correct answer is A 2