Question

8-18 А QZY, Inc. is evaluating new widget machine offered by three companies. The chosen machi will be used for 3 years. Company Company Company $25,000 400 $20,000 900 First cost $15,000 Maintenance 1,600 and operating Annual benefit 8,000 Salvage value 3,000 13,000 6,000 9.000 4,500 NOTE: MARR used is 15%. Use 4 years instead of 3 years. ("The chosen machine will be used for 4 years.") Solve for the following for each company machines: 1. Incremental ROR 2. Future Worth Analysis 3. Payback Period 4. Benefit Cost Ratio Analysis 5. Change the First Cost for Company B to $35,000 and re-calculate your answers for a-d above.

Answer 1

Incremental RoR = Average Annual Inflow after tax and depreciation/average investment

Future worth analysis could be done by calculating NPV of different companies.

Whereas NPV is the difference of PV of all cash inflows and Outflows

Pay Back Period = Initial Investment/Net Annual Cash Inflows

Benefit Cost ratio = Aggregate of PV of all cash inflows/Aggregate of PV of all cash Outflows

Co. Coc 15990 25 000 20 con Solution Initial Investment First cost & Add Maintenance & operating cost Total Tnitial Outtay($): 1600 400 goo 15 1660 2. So 2000 209.00 6. B Co.c 9.000 Net Annual Cash, Inflors! Annual Benefit : less apreciation maintain soperating Net Profis les: Del 13coo 4- 160 9 cop 6400 Zero 1260 4940 8120 3875 3400 7850 4220 Profit afre Dep. less. Tam Pritis afratar & Def Add! Dep. Net anand Cash Intion. 7850 3400 3eso 4225 470 3875 6400 12600 8600 working Notes: Depreciation: for Company A = 1500-3000 $3000 per annum Company B - 25000 - two 84450 pe anum Company C a 20000 - 4500 $3875 The anm.

Incrementa Rok= Aneage Annual Intoro afre too cool. Average Investment Average Investment = £ (Initial rement & Saluate toner Incremental ROR tor Company A = xleo = 50.64% 3400 xico ( 1530+300) for Company B = 7850 x 100 - so +6000 7850 x 100 = 5500 50.64%. for company c = 4225 x 100 (20.00+1570 = 4235 x 12200 34.4897% 6 future worth analysin could be done using nou. NPV = Aggregate of Pu of all cash Infrows - aggregate of fu of MRRRIA 15% all Cash Outflows Pu factor for annuity for 4 years = 2.8550 Pu of a sing single amount for 4 years 20.5718 NPV for company A = seos 640082.8550+ 3000x0.5718 - 15000 - 18272 +1715.4+1242-1500 N987.4 NPV for company B = 126004 2.8550 + 6000X0.5718- 2500 - 37973+3430.8-2500 16403.8) NPU for company c. 8100 X 2.8550+ USCOX0-596-2000 23128.5 +2573/-2060056986 for all three project Company have positive value of Npv Therefore all are profitable for future point of view but the Company B worth is highest (Highest NPW).

tet (3) Benefit Cost Ratio Pay Back Period Analyn: - Initial Investment Net Annual Cash Inflow for Company A = 15000 buco = 2.3437 years for Company B = 25 ceo a 12.600 = 1.9841 years. for Company c= 20000 - 2.4691 years According to pay back period method Pay back Penied) es recommended Company B (with lowest " Benefit Cost & Cost Ratio Ratio Analysin & Analysin = Aggregate of Aggregate of Prof all Cash Eufono Aggregate of fu of all cash adflow for 18272+175.Y Company A = 15 1 15 ceo : 1.3324 for lisson company B = 37973+3430.8 2goo Company c = 231255 +2573.1 20000 for 1.2843 Ratio with the value greates than 1 shows the profitability Therefore all company A, B and care profitable but Company o es highly recommended because of highest value of the ratio,

5. first cost of company B changes to $ 35000 Then Initial Investment. $35000 Anmal Benefit: 13000 for Company B lex: Maintainence cost: 400 Net Profit : 12600 sep. Project Value less: Depreciation: 7250 Profit Befor tax = 35000 of 6000 5350 les tax -$7250 per years Profit afte Tax 5350 Add: Dep. 7190 Net Annual Cash Inflow 18600 Dep. Cost of the Shop - line Now (as Incremental Ror of Company B .. 5350X100. Sex100, 26.09 £13500+6000) -20500 (b future worth Analysin: NPV = 12600 x2-8550 + bww x0.578 - 3560 = 35973 +3430.8-35oo = $44038 ☺ Pay Back Period 35oo .= 2.77 years 12600 Benefit Cost Ratio = 35973+343008 350o = 1.1258