A company has to select a new type of manufacturing equipment to manufacture a n

Question

A company has to select a new type of manufacturing equipment to manufacture a new product to be sold in the next years. The company has two options of different equipment to invest. The first equipment costs 25.000 euro and the second equipment costs 30.000 euro. The company has prepared two budgets with the net cash flows for the next 5 years with the sales and the manufacturing costs including the depreciation of each equipment. Which equipment would you select? Why?

The interest rate per year is 10%

YEAR

1

2

3

4

5

OPTION A

       50.000 €

       60.000 €

       65.000 €

       71.000 €

       78.000 €

OPTION B

       53.000 €

       64.000 €

       67.500 €

       74.000 €

       80.000 €

YEAR

1

2

3

4

5

OPTION A

       50.000 €

       60.000 €

       65.000 €

       71.000 €

       78.000 €

OPTION B

       53.000 €

       64.000 €

       67.500 €

       74.000 €

       80.000 €

Explanation / Answer

ANSWER: In the present situation calculate the net present value of both the equipments and decide in which equipment to invest in. Select the equipment which gives the highest net present value. Calculation of net present value of both the Equipments: Amount in Euros Year Pvf @ 10% Cash Flows Present Value Option 1 Option 2 Option 1 Option 2 0 1 -25 -30 -25 -30 1 0.909 50 53 45.45 48.177 2 0.826 60 64 49.56 52.864 3 0.751 65 67.5 48.815 50.6925 4 0.683 71 74 48.493 50.542 5 0.621 78 80 48.438 49.68 Net present value 215.756 221.9555 I would select equipment 2 Because it is giving hishest net present value when all cash flows were brought into present value.

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