Question

Alton Manufacturing, Inc. has a manufacturing machine that needs attention. i (Click the lcon to view additional information.) (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of S1 table.) Alton expects the following net cash inflows from the two options: EEB(Click the icon to view the net cash flows.) (Click the icon to view Future Value of $1 table.) Alton uses straight-line depreciation and requires an annual retum of 12 % . (Click the icon to view Future Value X Data Table Read the recuirements Requirement 1. Compute the payback, the ARR, the NPV, and the profitability index of these tvo options. Purchase New Year Refurbish Current Compute the payback for both options. Begin by completing the payback schedule for Option 1 (refurbish). Machine Machine X Net Cash Outflows Net Cash Inflows More Info 1.070,000 $ 120.000 1 Amount Invested Accumulated Yea Annual 460.000 310.000 1,300,000 400.000 3 250,000 1 a00 000 IErerbished Alton exnents the machine to last 340.000 4 190,000 2 another eight years and then have no residual value. Option 2 is to replace the machine at a cost of $1,500,000. A new machine would last 10 years and have no residual value. 130,000 280,000 3 130,000 6 280,000 7 130,000 280.000 5 130,000 280.000 Print Done 6 9 280.000 280.000 10 Requirements 2,340,000 $ 3.000.000 Totel Enter any number in the edit fields and then click Check Answen 1 Compute the payback, the ARR, the NPV, and the profitability index of these Print Done two options. O parts remalning 2 Which option should Alton choose? Why? Check Answer

Answer 1

A C D E F G Option 1 Discounted Factor Net Cash Outflows Net Cash Inflows Discounted Net Cash Inflows 2 Amount Invested Annual Accumulated @ 12 % Annual Accumulated Year 2 0 1,300,000.00 4 $1,070,000.00 $1,070,000.00 310,000.00 $1,380,000.00 250,000.00 $1,630,000.00 190,000.00 $1,820,000.00 S130,000.00 $1,950,000.00 130,000.00 $2,080,000.00 130,000.00 $2,210,000.00 S 130,000.00 $ 2,340,000.00 $955,357.14 $ $247,130.10 $ 1,202,487.24 $177,945.06 $ 1,380,432.31 $120,748.43 1,501,180.74 $ 73,765.49 $ 1,574,946.23 65,862.05 $ 1,640,808.28 58,805.40 $ 1,699,613.68 52,504.82 $ 1,752,118.50 0.89286 1 955,357.14 5 2 0.79719 6 3 0.71178 7 4 0.63552 8 5 0.56743 9 0.50663 6 10 7 0.45235 11 8 0.40388 12 13 1.80 Years Payback Period 14 ARR 10% 15 452,118.50 NPV 16 Profitability Index 1.35 17 18 Unrecovered cost at start of the Year 19 Pay Back Period Years Before full Recovery- Cash flow during the Year 20 Total Net Profit/No. of Years 21 ARR= x 100 Initial Cost 22 23 24 Net Present Value Discounted Cash Inflow - Net Cash Outflow 25 Net Cash Inflows 26 Profitability Index Net Cash Outflows 27 LL

M К Option 2 Discounted Factor Discounted Net Cash Inflows Net Cash Outflows Net Cash Inflows 2 Accumulated 12 % Amount Invested Annual Annual Year Accumulated 3 0 1,500,000.00 4 120,000.00 $ 120,000.00 $ 460,000.00 580,000.00 400,000.00 980,000.00 S 340,000.00 $1,320,000.00 280,000.00 $1,600,000.00 $ 280,000.00 $1,880,000.00 $ 280,000.00 $2,160,000.00 $ 280,000.00 $2,440,000.00 $ 280,000.00 S 280,000.00 $3,000,000.00 $107,142.86 $ 107,142.86 $366,709.18 473,852.04 $284,712.10 $ 758,564.14 $216,076.15 $ 974,640.29 $158,879.52 $1,133,519.81 $141,856.71 $1,275,376.52 $126,657.78 $1,402,034.30 $113,087.30 $1,515,121.60 $100,970.81 $1,616,092.41 90,152.51 $1,706,244.92 S 0.89286 1 5 2 0.79719 6 0.71178 3 7 4 0.63552 8 5 0.56743 0.50663 6 10 7 0.45235 11 8 0.40388 12 $2,720,000.00 9 0.36061 13 0.32197 10 14 15 4.70 Years Payback Period 16 ARR 10% 17 NPV 206,244.92 18 Profitability Index 1.14 19 20 CO O

A D F G Option 1 1 Net Cash Inflows Net Cash Outflows Discounted Factor Discounted Net Cash Inflows 2 Year Amount Invested Accumulated Annual @ 12 % Annual Accumulated 3 4 0 1300000 5 1 6 2 7 3 8 4 9 5 - C5 - 1 /POWER ( 1.12,A5) - 1 / POWER ( 1.12,A6) = 1 / POWER (1.12 A7) - C5 *E5 1070000 =F5 - D5 +C6 - C6 *E6 - C7*E7 - C8 *E8 - C9* E9 310000 -G5+F6 -D6 +C7 - D7 + C8 =D8 +C9 =D9+C10 - G6 + F7 250000 - 1 / POWER ( 1.12,A8) 1 / POWER ( 1.12,A9) - 1 / POWER ( 1.12,A10)C10*E10G9+ F10 - 1 /POWER( 1.12,A11)C11*E11G10+F11 - 1 / POWER ( 1.12,A12)C12*E12-G11+ F12 - G7 + F8 190000 - G8 + F9 130000 10 6 130000 11 7 130000 =D10+C11 12 8 = D11 +C12 130000 13 = ROUNDUP ( 1+((1300000-1070000)/310000),1) = ( ( D12 - B4 ) A12)/B4 Payback Period Years 14 ARR 15 - G12 - B4 NPV 16 - G12/B4 Profitability Index 17 18 Unrecovered cost at start of the Year 19 Pay Back Period Years Before full Recovery= Cash flow during the Year 20 Total Net Profit/No. of Years 21 ARR = 100 Initial Cost 22 23 24 Net Present Value Discounted Cash Inflow - Net Cash Outflow 25 Net Cash Infllows 26 Profitability Index Net Cash Outflows 27

M I J N C Option 2 1 Discounted Factor Net Cash Inflows Net Cash Outflows Discounted Net Cash Inflows 2 Accumulated @ 12 % 3 Year Amount Invested Annual Accumulated Annual 4 0 1500000 =N5 - K5 = L5 + K6 =L6+ K7 =L7+ K8 - 1/POWER (1.12,15) - 1 / POWER( 1.12,16) K6*M6 = 1 / POWER ( 1 .12,17) - 1 / POWER ( 1 .12,18) 1/ POWER ( 1.12,19) - 1 / POWER ( 1.12,I10)K10 *M10-09+N10 1/ POWER ( 1.12,I11)K11*M11010+N11 - 1 / POWER ( 1.12,112) K12*M12011+N12 - 1/POWER (1.12,113)K13*M13O12+N13 - 1 / POWER ( 1.12,114) K14*M14013+N1 4 - K5 *M5 5 1 120000 6 2 7 3 8 4 9 5 10 6 11 7 12 8 13 9 14 10 460000 -05+N6 - K7*M7 - K8 *M8 - K9*M9 - 06 + N7 - 07 + N8 400000 340000 - L8 + K9 -L9+ K10 =L10 + K11 = L11 + K12 - L12+ K13 = L13 + K14 280000 -O8 +N9 280000 280000 280000 280000 280000 15 =ROUNDUP ( 4+( (1500000-1320000)/280000),1) -( (L14 - J4 ) I 1 4 ) /J4 Payback Period Years 16 ARR 17 18 NPV -O14-J4 -014/ J4 Profitability Index 19 20