Let's assume the working for this question is for 7 years | |||||
as the Alpha has maximum years of cash generation | |||||
Option 1: | Replace Omega with Alpha now | ||||
Year | Cash from Alpha | PV factor | PV of Cash Flow | ||
0 | -4,80,000 | 1.00 | -4,80,000 | ||
1 | 4,40,000 | 0.91 | 4,00,000 | ||
2 | 4,80,000 | 0.83 | 3,96,694 | ||
3 | 5,20,000 | 0.75 | 3,90,684 | ||
4 | 5,60,000 | 0.68 | 3,82,488 | ||
5 | 6,00,000 | 0.62 | 3,72,553 | ||
6 | 6,40,000 | 0.56 | 3,61,263 | ||
NPV | 18,23,682 | ||||
Option 2: Replace Omega at the end of 5th year with Beta | |||||
Year | Cash Flow from Omega | Cash Flow from Beta | Net Cash Flow | PV factor | PV of Cash Flow |
1 | 3,20,000 | - | 3,20,000 | 1.00 | 3,20,000 |
2 | 3,20,000 | - | 3,20,000 | 0.91 | 2,90,909 |
3 | 3,20,000 | - | 3,20,000 | 0.83 | 2,64,463 |
4 | 3,20,000 | - | 3,20,000 | 0.75 | 2,40,421 |
5 | 3,20,000 | -4,80,000 | -1,60,000 | 0.68 | -1,09,282 |
6 | - | 4,40,000 | 4,40,000 | 0.62 | 2,73,205 |
7 | - | 4,84,000 | 4,84,000 | 0.56 | 2,73,205 |
NPV | 15,52,921 | ||||
The option to buy Alpha is clear as having higher NPV. |
Question four (b) Machines Alpha and Beta have the following cash flows: Cash flows (Shs '000")...
Question 27 Machine B is expected to produce the following real cash flows: Machine B CO -120 C 1 130 Cash flows C2 141 15.3 Machine C was purchased five years ago and produces an annual real cash flow of $75,000. It has no salvage value but is expected to last another five years. The company can replace machine C with machine B either now or at the end of five years. The real opportunity cost of capital is 10%....