one year ago, caffe viva coffee roasting co. purchased three small-batch coffee

Question

one year ago, caffe viva coffee roasting co. purchased three small-batch coffee roasters for $3.3 million now in 2015, the company finds that new roasters that offer significant advantages are available. the new roasters can be purchased for $4.5 million, and have no salvage value. both the new and old roasters are expected to last until 2020. i.e for 5 yeras. managment anticipates that the new roasters will produce annual cash revenues of $750,000, while the current roasters are expectd to produce $600,000 cash a year. the current market value of the old roasters is $1.5 million, i.e. caffe viva decides to replace the old roasters with the new ones, they will receive additional $1.5 million dollar cash now. the company's hurdle rate is 10%.

Based on the above given information answer the following questions:

1) find the cash flows to be received or spent every year for the next 5 yeras if roasters are replaced:

a) an initiation i.e t=0 the net cash flow will be =

b) In the 1st year i.e. t=1 the replacement will create net cash of the amount =

c) in the 2nd year i.e. t=2 the replacement will create net cash of the amount=

d) in the 3rd year i.e t=3 the replacement will create net cash of the amount=

e) in the 4th year i.e t=4 the replacement will create net cash of the amount=

f) in the 5th year i.e t=5 the replacement will create net cash of the amount=

2) create a timeline for this "roster replacement" project and calculate npv and irr

3) ignoring possible taxes on sale of used equipment should caffe viva replace its year-old roasters?

Explanation / Answer

the IRR is less than 0 as the undiscounted cashflow inflow is lesser than the undiscounted cash outflows.

1)the cash flows to be received or spent every year for the next 5 yeras if roasters are replaced: Year 0 1 2 3 4 5 NPV cost of new roaster (4,500,000) Sale of old roaster     1,500,000 Net cost of new roaster (3,000,000) revenue of new roaster 750,000 750,000 750,000 750,000 750,000 revenue of Current roaster    600,000    600,000    600,000    600,000    600,000 Incremental revenue    150,000    150,000    150,000    150,000    150,000 PF interest factor - 10%                      1 0.9091 0.8264 0.7513 0.6830 0.6209 Present value of cashflow (3,000,000)    136,364    123,967    112,697    102,452      93,138 (2,431,382) The present value of cash inflows is lesser than the present value of cash outlfow hence negative NPV. 3) as the NPV is negative the caffe viva should not replace the old roasters

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