Assala Corporation manufactures products for the construction market. The compan
ID: 2576616 • Letter: A
Question
Assala Corporation manufactures products for the construction market. The company is considering purchasing one of the following computerized laser models for cutting steel. Assala’s cost of capital is 12%. Its tax rate is 35%.
Model A
Model B
Cost of the machine
AED 500,000
AED 600,000
Life of machine
5 years
5 years
Salvage (resale) value – Year 5
AED 30,000
AED 40,000
Annual revenues
AED 140,000
AED 160,000
Annual operating expenses (including Depreciation)
AED 75,000
AED 85,000
Major repairs – year 3
AED 18,000
AED 20,000
Required 1.
With using the NPV, IRR and payback criteria, the company has asked you to analyze the two options and make some recommendations.
Model A
Model B
Cost of the machine
AED 500,000
AED 600,000
Life of machine
5 years
5 years
Salvage (resale) value – Year 5
AED 30,000
AED 40,000
Annual revenues
AED 140,000
AED 160,000
Annual operating expenses (including Depreciation)
AED 75,000
AED 85,000
Major repairs – year 3
AED 18,000
AED 20,000
Explanation / Answer
Present worth = Cashflow / ((1 + MARR) ^ number of period)
Net Present worth = Sum of the present worth of all the cashflows
IRR is the cost of capital at which the NPV is zero. It is computed through trial and error basis.
Year Cashflow Cost of Cap. PW NPW 0 -500000 12% -500000 -261479 1 65000 12% 58035.71 2 65000 12% 51817.6 IRR 3 47000 12% 33453.67 -11% 4 65000 12% 41308.68 5 95000 12% 53905.55 Year Cashflow Cost of Cap. PW NPW 0 -600000 12% -600000 -321180 1 75000 12% 66964.29 2 75000 12% 59789.54 IRR 3 55000 12% 39147.91 -12% 4 75000 12% 47663.86 5 115000 12% 65254.09Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.