Question

Question 2 A firm is planning to introduce a new product and has called for bids for the construction of the plant to manufacture the product. The cash flows predicted for the two bids under consideration are given below: Cash Flow Year Plant A Plant B 0 -90,000 -50,000 1 45,000 30,000 2 55,000 37,000 3 50,000 28,000 Using the net present value (NPV) approach, with an interest rate of 7% p.a., which plant should the company choose? (10 marks) Question 3 a) For a loan of $55,000, with an annual interest rate of 5 % p.a. compounded monthly, and monthly repayments of $1,100. Find the number of payments required to repay the loan. How many years is this? (5 marks) b) CompuSystems was supposed to pay a manufacturer $19,000 on a date 4 months ago. CompuSystems is proposing to pay $10,000 today and the balance in 5 months, when it will receive payment on a major sale to the government. Assuming that the manufacturer requires 18% per year compounded monthly on overdue accounts. What should the second payment be? (10 marks)

Answer 1

2.
Since PV Tables are not given, i have calculated PV values myself rounded off to 4 decimal places.

Plant A

Year	Cash Flow	PV Factor	PV
0	$      (90,000)	1	$   (90,000)
1	$       45,000	0.935	$     42,075
2	$       55,000	0.873	$     48,015
3	$       50,000	0.816	$     40,800
		NPV	$    40,890

Plant B

Year	Cash Flow	PV Factor	PV
0	$      (50,000)	1	$   (50,000)
1	$       30,000	0.935	$     28,050
2	$       37,000	0.873	$     32,301
3	$       28,000	0.816	$     22,848
		NPV	$    33,199

Since Plant A has higher NPV, therefore company should choose Plant A.

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