Pronto Cleaners, a chain of drycleaning stores, has the opportunity to invest in

ID: 2381089 • Letter: P

Question

Pronto Cleaners, a chain of drycleaning stores, has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of $29,200. It will cost an additional $6,280 to have the machine delivered and installed, and the expected residual value at the end of four years is $4,470. Machine B has a four-year expected life and a cost of $55,600. It will cost an additional $7,300 to have the machine delivered and installed, and the expected residual value at the end of four years is $5,810. Pronto has a required rate of return of 12 percent. Additional cash flows related to the machines are as follows:

Machine A Item Year 1 Year 2 Year 3 Year 4 Labor saving $25,100 $25,100 $25,100 $25,100 Power saving 1,520 1,520 1,520 1,520 Chemical saving 3,100 3,100 3,100 3,100 Additional maintenance (1,150) (1,150) (1,150) (1,150) Additional miscellaneous (2,390) (2,390) (2,390) (2,390)
Machine B Item Year 1 Year 2 Year 3 Year 4 Labor saving $31,800 $31,800 $31,800 $31,800 Power saving 1,920 1,920 1,920 1,920 Chemical saving 3,400 3,400 3,400 3,400 Additional maintenance (1,600) (1,600) (1,600) (1,600) Additional miscellaneous (2,790) (2,790) (2,790) (2,790) Pronto Cleaners, a chain of drycleaning stores, has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of $29,200. It will cost an additional $6,280 to have the machine delivered and installed, and the expected residual value at the end of four years is $4,470. Machine B has a four-year expected life and a cost of $55,600. It will cost an additional $7,300 to have the machine delivered and installed, and the expected residual value at the end of four years is $5,810. Pronto has a required rate of return of 12 percent. Additional cash flows related to the machines are as follows:

Machine A Item Year 1 Year 2 Year 3 Year 4 Labor saving $25,100 $25,100 $25,100 $25,100 Power saving 1,520 1,520 1,520 1,520 Chemical saving 3,100 3,100 3,100 3,100 Additional maintenance (1,150) (1,150) (1,150) (1,150) Additional miscellaneous (2,390) (2,390) (2,390) (2,390)
Machine B Item Year 1 Year 2 Year 3 Year 4 Labor saving $31,800 $31,800 $31,800 $31,800 Power saving 1,920 1,920 1,920 1,920 Chemical saving 3,400 3,400 3,400 3,400 Additional maintenance (1,600) (1,600) (1,600) (1,600) Additional miscellaneous (2,790) (2,790) (2,790) (2,790) Problem 9-8 Pronto Cleaners, a chain of drycleaning stores, has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of $29,200. It will cost an additional $6,280 to have the machine delivered and installed, and the expected residual value at the end of four years is $4,470. Machine B has a four-year expected life and a cost of $55,600. It will cost an additional $7,300 to have the machine delivered and installed, and the expected residual value at the end of four years is $5,810. Pronto has a required rate of return of 12 percent. Additional cash flows related to the machines are as follows:

Machine A Item Year 1 Year 2 Year 3 Year 4 Labor saving $25,100 $25,100 $25,100 $25,100 Power saving 1,520 1,520 1,520 1,520 Chemical saving 3,100 3,100 3,100 3,100 Additional maintenance (1,150) (1,150) (1,150) (1,150) Additional miscellaneous (2,390) (2,390) (2,390) (2,390)
Machine B Item Year 1 Year 2 Year 3 Year 4 Labor saving $31,800 $31,800 $31,800 $31,800 Power saving 1,920 1,920 1,920 1,920 Chemical saving 3,400 3,400 3,400 3,400 Additional maintenance (1,600) (1,600) (1,600) (1,600) Additional miscellaneous (2,790) (2,790) (2,790) (2,790) Pronto Cleaners, a chain of drycleaning stores, has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of $29,200. It will cost an additional $6,280 to have the machine delivered and installed, and the expected residual value at the end of four years is $4,470. Machine B has a four-year expected life and a cost of $55,600. It will cost an additional $7,300 to have the machine delivered and installed, and the expected residual value at the end of four years is $5,810. Pronto has a required rate of return of 12 percent. Additional cash flows related to the machines are as follows: Ignoring taxes, determine the net present value of investing in machine A. Ignoring taxes, determine the net present value of investing in machine B. Which, if any, machine should be purchased?

Explanation / Answer

Machine A

Item

Year 1

Year 2

Year 3

Year 4

Labor saving

$25,100

Power saving

1,520

Chemical saving

3,100

Additional maintenance

(1,150)

Additional miscellaneous

(2,390)

SALVAGE VALUE

4470

CASH FLOWS EACH YEAR

26180

30650

INITIAL INVESTMENT = 29200+6280

=35480

NPV = 26180*PVIFA(12%,3)+ 30650*PVIF(12%,4) - 35480

=26180*2.4018 + 30650*0.6355 - 35480

=62879 + 19478