Tulsa Company is considering investing in new bottling equipment and has two opt

Question

Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years, Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa's cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa's controller: Option A ion Initial investment Annual cash inflows Annual cash outflows Costs to rebuild Salvage value Estimated useful life $ 320,000 150,000 70,000 120,000 $ 454,000 160,000 75,000 24,000 8 years 8 years Required Calculate NPV. (Future Value of $1, Present Value of $1, Future Value Annuity_of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.) Option A Year Cash Flows PV factor Present Value 11% Initial Investment Annual Cash Flows Cost to Rebuild Salvage Net Present Value 1-8 4 Option B Year Cash Flows PV factor Present Value 11% Initial Investment Annual Cash Flows Cost to Rebuild Salvage Net Present Value 1-8 4 Determine which option Tulsa should select? O Option EB O Option A

Explanation / Answer

Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years, Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa's cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa's controller: Option A ion Initial investment Annual cash inflows Annual cash outflows Costs to rebuild Salvage value Estimated useful life $ 320,000 150,000 70,000 120,000 $ 454,000 160,000 75,000 24,000 8 years 8 years Required Calculate NPV. (Future Value of $1, Present Value of $1, Future Value Annuity_of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.) Option A Year Cash Flows PV factor Present Value 11% Initial Investment Annual Cash Flows Cost to Rebuild Salvage Net Present Value 1-8 4 Option B Year Cash Flows PV factor Present Value 11% Initial Investment Annual Cash Flows Cost to Rebuild Salvage Net Present Value 1-8 4 Determine which option Tulsa should select? O Option EB O Option A

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.