Hanson Mechatronics is considering replacement of its computerized vertical bori
ID: 2744947 • Letter: H
Question
Hanson Mechatronics is considering replacement of its computerized vertical boring mills. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are the additional after-tax cash flows projected to occur due to increased productivity and reduced waste from errors. They are shown in the following table.
WACC is 8%
Initial Capital Expenditures
Compute payback (be sure to calculate partial final year), IRR to the tenths place, and NPV to the nearest dollar, for each option.
Initial Capital Expenditures $85,000 $160,000 $102,000 Year Machine A Machine B Machine C 1 28,200 32,000 50,000 2 27,200 24,000 30,000 3 17,800 37,000 33,500 4 25,280 38,000 10,000 5 10,000 21,000 10,000 6 14,800 23,000 8,900Explanation / Answer
Particulars Year Cash Flows Cum Cash Flows PVF @ 8% PV PVF @ 15% PV Initial Cost 0 -85000 -85000 1 -85000 1 -85000 Cash Inflows 1 28200 -56800 0.925926 26111.11 0.86956522 24521.74 Cash Inflows 2 27200 -29600 0.857339 23319.62 0.75614367 20567.11 Cash Inflows 3 17800 -11800 0.793832 14130.21 0.65751623 11703.79 Cash Inflows 4 25280 13480 0.73503 18581.55 0.57175325 14453.92 Cash Inflows 5 10000 23480 0.680583 6805.832 0.49717674 4971.767 Cash Inflows 6 14800 38280 0.63017 9326.51 0.4323276 6398.448 NPV 13274.84 -2383.23 Payback Period = 3 years+ 11800/25280 i.e 3.466 years IRR = 8% + 5.93 i.e 13.93% Particulars Year Cash Flows Cum Cash Flows PVF @ 8% PV PVF @ 1% PV Initial Cost 0 -160000 -160000 1 -160000 1 -160000 Cash Inflows 1 32000 -128000 0.925926 29629.63 0.99009901 31683.17 Cash Inflows 2 24000 -104000 0.857339 20576.13 0.98029605 23527.11 Cash Inflows 3 37000 -67000 0.793832 29371.79 0.97059015 35911.84 Cash Inflows 4 38000 -29000 0.73503 27931.13 0.96098034 36517.25 Cash Inflows 5 21000 -8000 0.680583 14292.25 0.95146569 19980.78 Cash Inflows 6 23000 15000 0.63017 14493.9 0.94204524 21667.04 NPV -23705.2 9287.182 Payback Period = 5 years + 8000/23000 i.e 5.34 years IRR = 1% + 1.97% i.e 2.97% Particulars Year Cash Flows Cum Cash Flows PVF @ 8% PV PVF @ 30% PV Initial Cost 0 -102000 -102000 1 -102000 1 -102000 Cash Inflows 1 50000 -52000 0.925926 46296.3 0.76923077 38461.54 Cash Inflows 2 30000 -22000 0.857339 25720.16 0.59171598 17751.48 Cash Inflows 3 33500 11500 0.793832 26593.38 0.45516614 15248.07 Cash Inflows 4 10000 21500 0.73503 7350.299 0.3501278 3501.278 Cash Inflows 5 10000 31500 0.680583 6805.832 0.26932907 2693.291 Cash Inflows 6 89000 120500 0.63017 56085.1 0.20717621 18438.68 NPV 66851.07 -5905.67 Payback Period = 2 years + 22000/33500 i.e 2.66 years IRR = 8% +20.21 % i.e 28.21%
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