Questions 9 and 10 refer to the following information: Concepts X Company is con
ID: 2509817 • Letter: Q
Question
Questions 9 and 10 refer to the following information: Concepts X Company is considering replacing one of its machines machine are $66,000 per year, will cost S costs with the currest will last t will not be in onder to save operating10 which tre expected to be 538,310 peryea only $5,000o. wil also last ng It can be sold foe $1,500. The current 00our years ags, but its current disposal value is [8pt]9, Assuming a discount rate of 7%, what in the incremental net present Sam value of replacing the currest machine rd' for six more years, 2) the salvage value of the new equipment, whst is the approximate Internal rate of 8 pt 10. Assume the following two chsngns: 1) both machlnes will lant e after six years will be zero. If X Company replaces the eureat return? unity College. The college has deckded not to rest vending Middleto and promises to bay them back in our 0,0e snack operation is $0.11(X)67,600, wbere X is the nusraber B, but it in each of the next Soue years. X Company is willitg to purchase the machines back ins four yeans for $3,500 00 FO 008 1] Reconsider the lecture example regarding Middletown mnchines but instead to bay them. X Company wit sell machines to Comm rs. Assume that Middletown's annual profit equation Middlete of snack items sold. Middletown expects to Assuming Middletown wants a 7% return on this investment, what is 11. AO $42754 BO 6,6 cO 75, DO $100,584 with the most they can pay for the vending machinest O$133,777 FO S177,923 Present Value of $1.00 0917 0.621 0593 O 0.651 Present Value of an Annuity of $1.00 90 690 3.890 3.791 3.696 3.605 6.582 6.380 5.206 5033 968Explanation / Answer
Solution:
Part -9
Calculation of Net Cash Outflow required for New Machine
$$
Cost of New Machine
$155,000
Less: Expected Sales Proceeds from Old Machine
($5,000)
Total Cash outflow required
$150,000
Annual Saving in Operating Cost = Operating Cost with current machine $66,000 – Expected Operating cost with new machine $38,310 = $27,690
Calculation of Incremental Net Present Value
Years
0
1
2
3
4
5
Net Cash Outflow required for new machine
($150,000)
Annual Saving in Operating Cost (Cash Inflow)
$27,690
$27,690
$27,690
$27,690
$27,690
Salvage Value of new machine
$1,500
Net Cash Flow
($150,000)
$27,690
$27,690
$27,690
$27,690
$29,190
Discount Factor @ 7%
1
0.935
0.873
0.816
0.763
0.713
Present Value
($150,000)
$25,890
$24,173
$22,595
$21,127
$20,812
Incremental Net Present Value
($35,402)
The correct answer is A. -$35,402
Part 10 ---
IRR is the discounting rate at which Present Value of Net Cash Outflow will be equals to Present Value of Net Cash Inflow. In other words the Net Present Value is zero at IRR. It can be calculated by using trial and error method.
At 0.03 the net Present value is equals to 0
Years
0
1
2
3
4
5
6
Net Cash Outflow required for new machine
($150,000)
Annual Saving in Operating Cost (Cash Inflow)
$27,690
$27,690
$27,690
$27,690
$27,690
$27,690
Net Cash Flow
($150,000)
$27,690
$27,690
$27,690
$27,690
$27,690
$27,690
Discount Factor @ 3%
1
0.971
0.943
0.915
0.888
0.863
0.837
Present Value
($150,000)
$26,887
$26,112
$25,336
$24,589
$23,896
$23,177
Incremental Net Present Value
($3)
Hence, the IRR is 0.03 or 3%
The correct option is A. 0.03
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Pls ask separate question for remaining parts.
$$
Cost of New Machine
$155,000
Less: Expected Sales Proceeds from Old Machine
($5,000)
Total Cash outflow required
$150,000
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