odernize its production facilities and is considering either a conveyor system o

Question

odernize its production facilities and is considering either a conveyor system or a fleet of forklift trucks for m foreseeable future. The conveyor system cash flows of: oving materials. Whichever system the company chooses will be in place for the would cost $40,000 to install, have a 6-year life, and generate after-tax Year Cash Flow $8,000 $14,000 $13,000 $12,000 $11,000 $10,000 2 5 6 The forklift system would cost $20,000, have 3-year life, and generate after-tax cash flows of Year Cash Flow $7,000 $13,000 $12,000 Assuming no change in prices so that each system could be replaced with the same cash flows, how much would the value of the company increase if it accepted the better system and kept it in place for six years? The company's cost of capital is 12%. a. $1,578.76 b. $2,146.23 c. $5,154.88 d. $8,824.03

Explanation / Answer

Option a. $1578.76 is correct Year Conveyor Forklift Dis Factor Conveyor Forklift 0         (40,000)         (20,000) (40,000.00) (20,000.00) 1              8,000              7,000 0.892857        7,142.86        6,250.00 2           14,000           13,000 0.797194     11,160.71     10,363.52 3           13,000           12,000 0.71178        9,253.14        8,541.36 4           12,000 0.635518        7,626.22                     -   5           11,000 0.567427        6,241.70                     -   6           10,000 0.506631        5,066.31                     -   Total 4.111407        6,490.94        5,154.88 EUAC        1,578.76        1,253.80

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