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**Drop down 1 : 18% discount rate, 14% cost of capital, rate higher than 18%,or

ID: 2426728 • Letter: #

Question

**Drop down 1 : 18% discount rate, 14% cost of capital, rate higher than 18%,or rate lower than 14%

Drop down 2 :contemporary technology is preferred or traditional equipment is preferred

Discount Rates, Quallty, Market Share, Contemporary Manuracturing Environmen Sweeney Manufacturing has a plant where the equipment is essentially worn out. The equipment must be replaced, and Sweeney is considering two competing investment alternatives. The first alternative would replace the worn-out equipment with traditional production equipment; the second alternative uses contemporary technology and has computer-aided design and manufacturing capabilities. The investment and after- tax operating cash flows for each alternative are as follows: Traditional Contemporary Year Equipment Technology (999,400) $(3,996,050) 205,800 400,750 605,950 801,100 801,100 801,100 1,007,200 2,004,800 2,004,800 2,004,800 602,700 405,400 195,250 195,250 195,250 195,250 195,250 195,250 195,250 195,250 4 7 8 9 10 The company uses a discount rate of 18 percent for all of its investments. The company's cost of capital is 14 percent. The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems Required: 1. Calculate the net present value for each investment using a discount rate of 18 percent. Round intermediate calculations and your final answer to the nearest dollar. If the NPV is negative, enter your answer as a negative value. NPV Traditional equipment Contemporary technology 2. Calculate the net present value for each investment using a discount rate of 14 percent. Round intermediate calculations and the final answer to the nearest dollan NPV Traditional equipment Contemporary technology

Explanation / Answer

1) NPV at 18% discount rate Traditional Contemporary Year Traditional Contemporary Discount 18% Disc cashflow Disc cashflow 0        (999,400)            (3,996,050) 1          (999,400)            (3,996,050) 1           602,700                  205,800 0.84745             510,758                  174,405 2           405,400                  400,750 0.71818             291,150                  287,811 3           195,250                  605,950 0.60863             118,835                  368,799 4           195,250                  801,100 0.51578             100,706                  413,191 5           195,250                  801,100 0.4371               85,344                  350,161 6           195,250                  801,100 0.37043               72,326                  296,751 7           195,250               1,007,200 0.31392               61,293                  316,180 8           195,250               2,004,800 0.26603               51,942                  533,337 9           195,250               2,004,800 0.22545               44,019                  451,982 10           195,250               2,004,800 0.19106               37,304                  383,037 NPV             374,278                (420,395) 2) NPV at 14% discount rate Traditional Contemporary Year Traditional Contemporary Discount 14% Disc cashflow Disc cashflow 0        (999,400)            (3,996,050) 1          (999,400)            (3,996,050) 1           602,700                  205,800 0.87719             528,682                  180,526 2           405,400                  400,750 0.76946             311,939                  308,361 3           195,250                  605,950 0.67497             131,788                  408,998 4           195,250                  801,100 0.59208             115,604                  474,315 5           195,250                  801,100 0.51936             101,405                  416,059 6           195,250                  801,100 0.45558               88,952                  364,965 7           195,250               1,007,200 0.39963               78,028                  402,507 8           195,250               2,004,800 0.35055               68,445                  702,783 9           195,250               2,004,800 0.3075               60,039                  616,476 10           195,250               2,004,800 0.26974               52,667                  540,775 NPV             538,149                  419,715 3) company should use 14% discount rate 4) Traditional Year Traditional Discount 14% Disc cashflow 0        (999,400) 1          (999,400) 1           602,700 0.87719             528,682 2           405,400 0.76946             311,939 3             97,625 0.67497               65,894 4             97,625 0.59208               57,802 5             97,625 0.51936               50,703 6             97,625 0.45558               44,476 7             97,625 0.39963               39,014 8             97,625 0.35055               34,222 9             97,625 0.3075               30,020 10             97,625 0.26974               26,333 NPV             189,685 5) Purchase Traiditional equipment