e Wyckoff Company specializes in decorative fruit baskets. Currently, the compan
ID: 2501505 • Letter: E
Question
e Wyckoff Company specializes in decorative fruit baskets. Currently, the company is analyzing purchase alternatives for a fruit-polishing machine. Data relevant to the decision are as follows.
Machine X
Machine Y
Cost
$80,000
$72,000
Useful life
5 years
5 years
Residual value
$2,000
$3,000
Estimated annual net cash flows
$32,000
$28,000
Present value multipliers at 12 percent:
Dollar received at the end of five years
567
Dollar received at the end of each of the next five years
3,605
a. Compute the payback period for each of the alternative. Round answer to two decimal places.
b. Using the net present value method, prepare an analysis to determine which machine the company should purchase. (The company uses a 12 percent minimum desired rate of return.)
Machine X
Machine Y
Cost
$80,000
$72,000
Useful life
5 years
5 years
Residual value
$2,000
$3,000
Estimated annual net cash flows
$32,000
$28,000
Explanation / Answer
Answer:a Payback Period:Intial investment/Estimated annual net cash flows
Machine X=$80000/$32000=2.5 years
Machine Y=$72000/$28000=2.57 Years
Answer:b Calculation of the NPV:
Machine X=-$80000+$32000(3.605)+$2000*(0.567)
=-80000+115360+1134
=$36494
Machine Y=-$72000+$28000(3.605)+$3000*(0.567)
=-72000+100940+1701
=$30641
Machine X should be purchase because its NPV is higher than Machine Y.
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