PACAGINGMACHINE#1 PACKAGING MACHINE#2 hitial Cost Time Period Labor Salvage Incr
ID: 2787318 • Letter: P
Question
PACAGINGMACHINE#1 PACKAGING MACHINE#2 hitial Cost Time Period Labor Salvage Increased Income Interest $532,000 D years $117,000hyr $86,000 $97,000 25% $40000 10 years $189,000y $10000 $0 25% Labor costs will increase 5% of 1st year's value per year after the first year. Use Excel to: a) Plot a cash flow diagram for each option. b) Perform PW analysis to determine which option is more economically attractive. (Applicable cell function: NPV) c) Perform a ROR analysis to determine which option is more economically attractive. (Applicable cell function; IRR) d) From the incremental cash flow table, plot PW vs. i . ( Use 5% increments from 0% to 60% ) e) On a single graph, plot Pw vs. i for each machine. ( Use 5% increments from 0% to 60% )Explanation / Answer
There is no Tax information given here. Therefore we’ll assume 0 tax.
For Machine 1, We have the below excel calculations.
Please note that depreciation = ( Initial Outlay – Salvage Value )/ 10
NPV = -$742,364.78 ( using rate = 25% )
IRR is not defined as at no point the cash flows change sign.
For Machine 2, we have the following Excel Calculations:
NPV = -$324,876.17
IRR is not defined as at no point the cash flows change sign.
We can see that both projects are negative NPV and none should be undertaken. However, if one has to be done, it should with Machine 2 as it has a lower negative NPV and thus will result in lesser value destruction.
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Investment Outlay 532000 Income 97000 Labor Expense 117000 122850 128992.5 135442.125 142214.2313 149324.9428 156791.19 164630.7495 172862.2869 181505.4 Depreciation 44700 44700 44700 44700 44700 44700 44700 44700 44700 44700 Operating Income before Taxes -64700 -167550 -173692.5 -180142.125 -186914.2313 -194024.9428 -201491.19 -209330.7495 -217562.2869 -226205 Operating Income after Taxes -64700 -167550 -173692.5 -180142.125 -186914.2313 -194024.9428 -201491.19 -209330.7495 -217562.2869 -226205 Add back: Depreciation 44700 44700 44700 44700 44700 44700 44700 44700 44700 44700 After Tax Operating Cash Flow -20000 -122850 -128992.5 -135442.125 -142214.2313 -149324.9428 -156791.19 -164630.7495 -172862.2869 -181505 Salvage Value 85000 Terminal Year After Tax Cash Flow -96505.4 Total After Tax cash flow -532000 -20000 -122850 -128992.5 -135442.125 -142214.2313 -149324.9428 -156791.19 -164630.7495 -172862.2869 -96505.4Related Questions
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