A restaurant operator wishes to choose between two alternative roll-in storage u
ID: 2475553 • Letter: A
Question
A restaurant operator wishes to choose between two alternative roll-in storage units. Machine A will cost $9,000 and have a trade-in value at the end of its five-year life of $1,500. Machine B will cost $8,500 and at the end of its five-year life will have a trade-in value of $700. As- sume straight-line depreciation.
Investment in the machine will mean that a part-time kitchen worker will not be required, and there will be an annual wage saving of $9,600. The following will be the operating costs, excluding depreciation, for each machine, for each of the five years.
Machine A Machine B Year 12345
Alternative 1
Alternative 2
$24,200 19,800 17,200 10,800
$ 8,400 11,600 17,000 23,000 24,000
8,000
The amount of the investment under either alternative will be $70,000.
Training $800
Maintenance 750 $750 $750 $750 $750
Overhaul Supplies Electricity
300 300 100 100
$550
300 300 300 100 100 100
12345
$700
650 $650 $650 $650 $650
400
500 500 500 500 500 100 100 100 100 100
Income tax rate is 30 percent. For each machine, calculate the NPV by using a 12 percent rate. Ignoring any other considerations, which ma- chine would be the preferable investment?
Explanation / Answer
Machine A Cost 9,000 Salvage value 1,500 life 5 Dep 1,500 Tax 450 After tax sale value 1,050 PV factor 0.56742 PV sale value 595.79 Machine B cost 8,500 salvage value 700 life 5 Dep 1,560 Tax 210 After tax sale value 490 PV factor 0.56742 PV sale value 278.04 Annual wage savings 9,600 op cost 1 2 3 4 5 A 24,200 19,800 17,200 10,800 8,400 Training 800 800 800 800 800 Maintenance 750 750 750 750 750 Overhaul Supplies Electricity 300 300 100 100 550 Elec 700 650 650 650 650 Dep 1,500 1,500 1,500 1,500 1,500 Total cost 28,250 23,800 21,000 14,600 12,650 Savings 9,600 9,600 9,600 9,600 9,600 Net cost 18,650 14,200 11,400 5,000 3,050 Tax savings 5,595 4,260 3,420 1,500 915 After tax cost 13,055 9,940 7,980 3,500 2,135 Add: Dep 1,500 1,500 1,500 1,500 1,500 Net cost 11,555 8,440 6,480 2,000 635 PV 0.89285 0.79719 0.71178 0.63551 0.56742 PV of cost 10,316.88 6,728.28 4,612.33 1,271.02 360.31 NPV 92,693.04 B 11,600 17,000 23,000 24,000 8,000 Training 800 800 800 800 800 Maintenance 750 750 750 750 750 Overhau 300 300 300 100 100 Dep 1,560 1,560 1,560 1,560 1,560 Elec 400 500 500 500 500 Total cost 15,410 20,910 26,910 27,710 11,710 Savings 9,600 9,600 9,600 9,600 9,600 Net cost 5,810 11,310 17,310 18,110 2,110 Tax savings 1,743 3,393 5,193 5,433 633 After tax cost 4,067 7,917 12,117 12,677 1,477 Add: Dep 1,560 1,560 1,560 1,560 1,560 Net cost 2,507 6,357 10,557 11,117 (83) PV 0.89285 0.79719 0.71178 0.63551 0.56742 PV of cost 2,238.37 5,067.74 7,514.26 7,064.96 (47.10) NPV 91,560.21 Machine B with lesser negatie NPV is preferreable Cashflow in year 0 A 70,000 B 70,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.