Question

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BONUS QUESTIONS 5a) A manufacturer of braided steel tire rubber molding equipment for automotive tire rubber fabrication in considering purchase either a semi-automatic or fully automatic system. The estima for each are as follows: Semi-Automatic Fully Automatic First Cost Annual Disbursement Annual Benefits Salvage Value Life $160,000 $ 3.000 $ 70,000 S 11,000 8 yrs $200,000 $ 6,000 $100,000 S 20,000 4 yrs Determine which machine should be selected if MARR is 12t/yr. (Use either the Net Present Worth (NPW), Annual Worth (AW), Benefit Cost (B/C) or the Rate of Return (ROR) Methods. 5b) A company borrowed $60,000 at 12% interest. The loan was repaid according to the following schedule. Find X, the balloon amount that will pay off the loan at the end of five years? Hint: (Draw the representative gradient cash flow diagram, noting the excess $10K payment amount in year 4 over the gradient series of $1,000 per year & then solve for X). Year مردہ لا اله الا Amount - $60,000 $6,000 $7,000 $8,000 $19,000

Answer 1

In capital budgeting analysis, there are many methods available for evaluating a project whether to accept or not. The methods include: Net Present Value (NPV), Profitability Index (PI), Internal Rate of Return (IRR), Accounting Rate of Return (ARR), Payback Period, Discounted Payback Period, Annual Worth (AW), Equal Annual Cash Flow (EUAC), etc. Out of all these methods available, NPV is considered to be the best because it considers time value of money and delivers result in dollar value. So, for analyzing the given two alternatives, NPV should be the appropriate evaluation tool. However, when two or more projects with unequal lives are evaluated, AW should be the appropriate evaluation tool. NOTE: Present Value Factor (PVF) @ 12% = 1/(1+12%)"; 1/(1+12%);.... 1/(1+12%)"..... 1/(1+12%)"; 1/(1+12%)

Semi-Automatic -(q)+(r)+(s) (0) (s) (b) Annual Salvage Cash Flow Benefits value (q) Annual Disburse. (a) x (b) Year Present Value N (a) Discount Factor @ 12% 0.89286 0.79719 0.71178 0.63552 0.56743 0.50663 0.45235 0.40388 m 7 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 in $70,000 $67,000 $59,821.62 $70,000 $67,000 $53,411.73 $70,000 $67,000 $47,689.26 $70,000 $67,000 $42,579.84 $70,000 $67,000 $38,017.81 $70,000 $67,000 $33,944.21 $70,000 $67,000 $30,307.45 $70,000 $11,000 $78,000 $31,502.64 Present Value of future Cash Flows $337,274.56 Less: Initial Investment -$160,000.00 Net Present Value (NPV) $177,274.56 Annuity factor @12% for 8 periods 4.96764 [Sum of Discount factors from year-1 thru 8] Annual Worth (AW) $35,685.87 ($177274.56 / 4.96764] 00

Fully Automatic -(q)+(r)+(s) (0) (s) (b) (a) x (b). (a) Discount Factor @ (q) Annual Disburse. Year Annual Benefits Salvage value Cash Flow Present Value 12% 2 0.89286 0.79719 0.71178 0.63552 $6,000 $6,000 $6,000 $6,000 4 $100,000 $94,000 $83,928.84 $100,000 $94,000 $74,935.86 $100,000 $94,000 $66,907.32 $100,000 $20,000 $114,000 $72,449.28 Present Value of future Cash Flows $298,221.30 Less: Initial Investment -$200,000.00 Net Present Value (NPV) $98,221.30 Annuity factor @12% for 4 periods 3.03735 [Sum of Discount factors from year-1 thru 4] Annual Worth (AW) $32,337.83 ($98221.3/3.03735] Conclusion: As the Annual Worth (AW) of Semi-Automatic machine is higher than AW of Fully Automatic machine, firm must choose Semi-Automatic.