Homework Answers
Option 1) Old mixture is retained
| Particulars | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | Sum of PV |
| Cost of new mixer | -25000 | |||||||||||
| Annual operating cost of new mixer | -5000 | -5000 | -5000 | -5000 | -5000 | -5000 | -5000 | -5000 | -5000 | -5000 | ||
| Annual operating cost of old mixer | -6000 | -6000 | -6000 | -6000 | -6000 | -6000 | -6000 | -6000 | -6000 | -6000 | ||
| Salvage value of new mixer | 4000 | |||||||||||
| Salvage value of old mixer | 2500 | |||||||||||
| Total cash flow | -25000 | -11000 | -11000 | -11000 | -11000 | -11000 | -11000 | -11000 | -11000 | -11000 | -4500 | |
| PVIF @ 15% | 1.0000 | 0.8696 | 0.7561 | 0.6575 | 0.5718 | 0.4972 | 0.4323 | 0.3759 | 0.3269 | 0.2843 | 0.2472 | |
| PV | -25000.00 | -9565.22 | -8317.58 | -7232.68 | -6289.29 | -5468.94 | -4755.60 | -4135.31 | -3595.92 | -3126.89 | -1112.33 | -78599.75 |
Thus NPV is - 78599.75
Option 2) Sold old mixer and buy new one
| Particulars | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | Sum of PV |
| Cost of new mixer | -25000 | |||||||||||
| Salvage value of old mixer | 10000 | |||||||||||
| Annual operating cost of new mixer | -8000 | -8000 | -8000 | -8000 | -8000 | -8000 | -8000 | -8000 | -8000 | -8000 | ||
| Salvage value of new mixer | 6000 | |||||||||||
| Total cash flow | -15000 | -8000 | -8000 | -8000 | -8000 | -8000 | -8000 | -8000 | -8000 | -8000 | -2000 | |
| PVIF @ 15% | 1.0000 | 0.8696 | 0.7561 | 0.6575 | 0.5718 | 0.4972 | 0.4323 | 0.3759 | 0.3269 | 0.2843 | 0.2472 | |
| PV | -15000.00 | -6956.52 | -6049.15 | -5260.13 | -4574.03 | -3977.41 | -3458.62 | -3007.50 | -2615.21 | -2274.10 | -494.37 | -53667.04 |
Thus NPV is - 53667.04$
Thus option 2 should be selected as it is less costly
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