Farmers are deciding the purchase of harvesting-related processing equipment which both have the same output. Processor A has a first cost of $32,000, its operating cost will be $5500 per year, and its salvage after 3 years will be $7000. Processor B has a first cost of $37,000, an operating cost of $7250, and a resale value of $12,000 after 4 years. Use an interest rate of 8%. What is the net EUAC of each processor and which one should be chosen?
Answers: EUACA = __________, EUACB = __________, Select? __________<12 pts>
Work:
Equivalent Uniform Annual Cost for Processor-A (EUACA)
Net Present Value (NPV)
Year |
Annual cash flows ($) |
Present Value Factor (PVF) at 8.00% |
Present Value of annual cash flows ($) [Annual cash flow x PVF] |
1 |
-5,500 |
0.9259259 |
-5,092.59 |
2 |
-5,500 |
0.8573388 |
-4,715.36 |
3 |
1,500 [-5,500 + 7,000] |
0.7938322 |
1,190.75 |
TOTAL |
2.5770970 |
-8,617.21 |
|
Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment
= -$8,617.21 - $32,000
= -$40,617.21
Equivalent Uniform Annual Cost for Processor-A (EUACA)
Equivalent Uniform Annual Cost for Processor-A (EUACA) = Net Present Value / [PVIFA 8.00%, 3 Years]
= -$40,617.21 / 2.5770970
= -$15,760.84 (Negative)
Equivalent Uniform Annual Cost for Processor-B (EUACB)
Net Present Value (NPV)
Year |
Annual cash flows ($) |
Present Value Factor (PVF) at 8.00% |
Present Value of annual cash flows ($) [Annual cash flow x PVF] |
1 |
-7,250 |
0.9259259 |
-6,712.96 |
2 |
-7,250 |
0.8573388 |
-6,215.71 |
3 |
-7,250 |
0.7938322 |
-5,755.28 |
4 |
4,750 [-7,250 + 12,000] |
0.7350299 |
3,491.39 |
TOTAL |
3.3121268 |
-15,192.56 |
|
Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment
= -$15,192.56 - $37,000
= -$52,192.56
Equivalent Uniform Annual Cost for Processor-B (EUACB)
Equivalent Uniform Annual Cost for Processor-B (EUACB) = Net Present Value / [PVIFA 8.00%, 4 Years]
= -$52,192.56 / 3.3121268
= -$15,758.02 (Negative)
DECISION
The Farmers should choose “PROCESSIOR-B”, Since it has the lower Equivalent Uniform Annual Cost.
NOTE
The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.
Farmers are deciding the purchase of harvesting-related processing equipment which both have the same output. Processor...
10.2 California Imaging Center, a not-for-profit business, is evaluating the purchase of new diagnostic equipment. The equipment which costs $600,000, has an expected life of five years and an estimated salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for cach year of the project's life. On average, cach procedure is projected to generate $80 in cash collections during the first year of use. Thus, net...
Joey's Pizza Parlor is considering the purchase of a large oven and related equipment for mixing and baking Joey's Favorite Bread. The oven and equipment would cost $150,000 delivered and installed. It would be usable for about 15 years, after which it would have a 10% scrap value.The following additional information is available.Joey estimates that the purchase of the oven and equipment would allow the pizza parlor and restaurant to bake and sell 90,000 loaves of crazy bread each year....
1. LL Incorporated's currently outstanding 10% coupon bonds have a yield to maturity of 13%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt? Round your answer to two decimal places. 2. Summerdahl Resort's common stock is currently trading at $36.00 a share. The stock is expected to pay a dividend of $2.50 a share at the end...
CCC Conglomerates is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 12 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $378,000, annual operating costs of $22,000, and a 3-year life. Machine B costs $257,000, has annual operating costs of $43,000, and a 2-year...
Please help me fill in the
last blank
UPDATE: This is all the information I have been given. I just
need help with the last blank.
DCF analysis doesn't always lead to proper capital budgeting decisions because capital budgeting projects are not passive investments like stocks and bonds. Managers can often take positive actions after the investment has been made to alter a project's cash flows. These opportunities are real options that offer the right but not the obligation to...
The Alpha Dog Company manufactures and distributes a variety of pet-related products. In response to customer feedback relating to the fragile nature of many commercially available dog leashes, the company’s product development team has recently introduced a prototype of a new, virtually indestructible dog leash. The development of the prototype cost $250,000 in research and development costs. The product development team has presented their proposal to Adam Smith, the company’s president and CEO. Adam has asked you, as the chief...
Please select the correct answer and state why it is the correct answer. 1 Alex Co. has the following items listed in the asset section of its balance sheet. Which should be classified as a current asset? A) Investment in held-to-maturity securities. B) Prepaid insurance on a 3-year policy expiring within the year. C) Cash surrender value of life insurance policies. D) Cash to be used for sinking fund payments to retire long-term debt 2 Grown Company is a leading...
Just want to double check my answers. and it its wrong, which
one is the corrwcr answer.
A) $147,368 B) 552.632 $200,000 D) $140,000 6) Which of the following items should be depreciated? Tangible property, plast, and equipment other than and B) Intangible property C) Land D) Natural resources 7) Which of the following accounting principles requires depreciation? A) The revenue recognition principle B. The matching principle C) The reliability principle D) The entity concept 8) Which of the following...
Jurica Corporation manufactures various trim pieces for vehicle manufacturers. The company has a number of plants, including the Juriquilla Plant, which makes door trim pieces. Mr. Bates is both the regional manager for the Central America region and the plant manager of the Juriquilla Plant. His budget as the regional manager is charged to the Juriquilla Plant. Bates has just heard that the company received a bid from an outside vendor to supply the equivalent of the entire annual output...
Accounting 2-Case Study-Qual Support Corporation Plant Closing Case Study 1. QualSupport Corporation manufactures seats for automobiles, vans, trucks and various recreational vehicles. The company has a number of plants around the world, including the Denver Cover Plant, which makes seat covers. Ted Vosilo is the plant manager of the Denver Cover Plant but also serves as the regional productionmanager for the company. His budget as the regional manager is charged to the Denver Cover Plant Vosilo has just heard that...