Suppose that ABC Ltd is considering purchasing one of three new processing machines. Either machine would make it possible for the company to produce its products more efficiently.
Estimates regarding each machine are provided below:
Machine A Machine B Machine C
Original cost $79,000 $110,000 $244,000
Estimated life 7 years 8 years 10 years
Salvage value Nil Nil $30,000
Estimated annual cash inflows $30,000 $ 60,000 $58,500
Estimated annual cash outflows $ 7,000 $ 35,000 $18,500
If the projects can be repeated, which machine should ABC Ltd choose based on the NPV criteria at an 8% cost of capital?
Answers
Alternatives Cash Flow (CF) A B C D Initial cost Rs.70,000 Rs.12,40,000 Rs.1,80,000 Rs.5,40,000 CF Year 1 Rs.24,000 Rs.47,200 Rs.20,000 Rs.2,04,000 CF Year 2 Rs.24,000 Rs.1,80,000 Rs.17,000 Rs.1,57,000 CF Year 3 Rs.24,000 Rs.73,500 Rs.38,000 Rs.2,50,000 CF Year 4 Rs.24,000 Rs.26,700 Rs.76,000 Rs.75,000 CF Year 5 Rs.24,000 Rs.2,00,000 Rs.27,000 Rs.25,000 CF Year 6 Rs.24,000 Rs.4,50,000 Rs.13,000 Rs.16,000 CF Year 7 Rs.24,000 Rs.73,000 Rs.2,20,000 Rs.0
a) A
b) B
c) C
d) D
Sol. Given:-
Service life of equipment (n) = 7 years Cut=off year for recovery = 4 years Initial Cost of equipment’s for alternative:-
IA = Rs.70,000IB = Rs.12,40,000 IC= Rs.1,80,000 ID = Rs.5,40,000
Annual cash inflow after taxes Cumulative annual cash inflow after taxes Alternative (A) Alternative (B) Alternative (A) Alternative (B) Years 1 Rs.24,000 Rs.47,200 Rs.24,000 Rs.47,200
Answer:
hope this will help you
