The flower city grocery is faced with the following capital budgeting decision.

Question

The flower city grocery is faced with the following capital budgeting decision. Its display freezer system must be repaired. The cost of this repair will be $1000 and the system will be usable for another five years. Alternatively, the firm could purchase a new freezer system for $5000 and sell the old for $500. The new freezer system has more display space and will increase the profits attributable to frozen foods by 30%. Profits for that department were $5000 in the last fiscal year. The company's cost of capital is 9%. Ignoring taxes, what should the firm do?

Explanation / Answer

this is a net present value problem, and you will have to discount annually based on the cost of capital. Option A- Repair -$1000 now +$5000/yr for 5 yrs NPV= 5000/1.09+5000/1.09^2+...-1000 NPV= 18,448.26 Option B- New Freezer -$5000, +$500 = -$4500 now +$5000*1.3= $6500/yr for 5 yrs NPV= 6500/1.09+6500/1.09^2...-4500 NPV= 20,782.73 Buy a new freezer.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.