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Problems 6
Problems 6
Problems 6
The old machine has a salvage value of $20,000 now and a predicted salvage value of
$4,000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a
predicted cost of $40,000.
The new machine costs $160,000 and has a predicted salvage value of $24,000 at the end
of six years. If purchased, the new machine will allow cash savings of $40,000 for each of
the first three years, and $20,000 for each year of its remaining six-year life.
Required:
What is the net present value of purchasing the new machine if the company has a required
rate of return of 14%?
Answer:
Predicted PV of
Cash Flows Year(s) PV Factor Cash Flows
Initial Investment $(160,000) 0 1.000 $(160,000)
Salvage of old 20,000 0 1.000 20,000
Annual operations 40,000 1-3 2.322 92,880
Annual operations 20,000 4-6 (3.889-2.322) 31,340
Save by not rebuilding 40,000 1 0.877 35,080
Salvage of new 24,000 6 0.456 10,944
Net present value $ 30,244
76. Supply the missing data for each of the following proposals.
Answer:
a.
Annual cash inflow $ 60,000
Present value factor for 10 years x 5.650
Initial investment $339,000
c.
Initial investment $62,900
PV of salvage value ($10,000 x 0.275) (2,750)
Net PV of annual net cash inflow $60,150
Look up value 5.650 in PV of annuity table under 10 years and the internal rate of
return is 12%.
Mountain Vehicle has received three proposals for its new vehicle-painting machine. Information
on each proposal is as follows:
Required:
Answer: