Question

8pt X Company is considering replacing one of its machines in order to save operating costs. Operating costs w current machine are $62,000 per year; operating costs with the new machine are expected to be $48,000 per year. The ne machine will cost $69,000 and will last for six years, at which time it can be sold for $1.000. The current machine will also last for six more years but will not be worth anything at that time. It cost $33,000 three years ago but is currently worth only $7,000. Assuming a discount rate of 8%, what is the incremental net present value of replacing the current machine with the new machine? 9. AO $3,352 BO $4,860 CO $7,018 DO $10,219 EO $14,818 FO $21,485 8pt X Company is planning to launch a new product. A market research study, costing $130,000, was conducted last yeur, indicating that the product will be successful for the next four years. Profits from sales of the product are expected to be $172,000 in each of the first two years and $110,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $79,000. New manufacturing equipment will have to be purchased for $310,000; it will have zero disposal value at the end of the four years. Assuming a discount rate of 6%, what is the net present value of launching the new product? 10. AO $34,667 BO $43,3341 CO $54,168 DO 567,709 EO $84,637 FO $105,796 8 pi X Company must replace one of its current machines with either Machine A or Machine B. The useful life of both machines is seven years. Machine A costs $52,000, and Machine B costs $65.000. Estimated annual cash flows with the two machines are as follows: Year Machine A Machine B S-6,000 3-7,000 -8,000 -4,000 -8,000 -3,000 -8,000 -3,000 -6,000 -3,000 -5,000 -2,000 -4,000 -2,000 X Company buys Machine B instead of Machine A, what is the payback period (in years)? AO 2 BO 3 CO 4 DO 5 EO 6 FO7 USE THE PRESENT VALUE TABLES ON THE NEXT PAGE

Answer 1

amount table factor present value -$69,000 $7,000 $64,722 $630 9 year -$69,000 cost of new machine 0 1.000 $7,000 salvage value of old machine 0 1.000 $14,000 savings in annual operating costs 1--4 4.623 $1,000 salvage value of new machine 4 0.630 net present value of replacing the current machine with new machine $3,352 A $3,352 hence, the correct answer is table factor present value 10 amount year advertisement campaign cost of manufacturing equipment profits profits profits profits -$79,000 -$79,000 -$310,000 0 1 -$ 310,000 $172,000 $172,000 0 1 $162,196 $153,080 1 0.943 0.890 2 $110,000 $110,000 $92,400 $87,120 3 0.840 0.792 net present value of launching the new product $105,796 F $105,796 hence, the correct answer is

cumulative machine incremental machine A incremental 11 year cash flow В cash flow -$6,000 -$8,000 -$8,000 -$ 8,000 -$6,000 -$5,000 -$4,000 -$7,000 -$4,000 -$3,000 -$3,000 -$1,000 $4,000 $5,000 $5,000 -$1,000 $3,000 $8,000 1 2 $13,000 $16,000 $19,000 -$3,000 $3,000 $3,000 $2,000 5 -$ 2,000 -$2,000 6 $21,000 7 extra cost in machine B $65,000-$52,000 $13,000 from the cumulative incremental cash flow column, the extra cost of $13,000 is recovered at the end of 4 years. Hence, the payback period is 4 years. C 4 hence, the correct answer is