Question
In: Finance
The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment....
The Rustic Welt Company is proposing to replace its old welt-making machinery with more modern equipment. The new equipment costs $10.8 million (the existing equipment has zero salvage value). The attraction of the new machinery is that it is expected to cut manufacturing costs from their current level of $9.80 a welt to $5.80. However, as the following table shows, there is some uncertainty about both the future sales and the performance of the new machinery: Pessimistic Expected Optimistic Sales (million welts) 2.2 2.3 2.5 Manufacturing cost ($ per welt) 7.80 5.80 4.80 Life of new machinery (years) 11 14 17 Conduct a sensitivity analysis of the replacement decision assuming a discount rate of 8%. Rustic does not pay taxes. Calculate the NPV.
Solutions
Expert Solution
| IC | Initial Cash Flow in million dollars | ($10.80) | ||||||||||
| A | Current Cost per Welt | $9.80 | $9.80 | $9.80 | $9.80 | $9.80 | $9.80 | $9.80 | $9.80 | $9.80 | ||
| B | New Cost per welt | $7.80 | $5.80 | $4.80 | $7.80 | $5.80 | $4.80 | $7.80 | $5.80 | $4.80 | ||
| C=A-B | Saving per welt | $2.00 | $4.00 | $5.00 | $2.00 | $4.00 | $5.00 | $2.00 | $4.00 | $5.00 | ||
| Sales in million welt | 2.2 | 2.2 | 2.2 | 2.3 | 2.3 | 2.3 | 2.5 | 2.5 | 2.5 | |||
| Annual Savings in Million dollar | $4.40 | $8.80 | $11.00 | $4.60 | $9.20 | $11.50 | $5.00 | $10.00 | $12.50 | |||
| CALCULATION OF PRESENT VALUE OF SAVINGS | ||||||||||||
| FOR LIFE OF NEW MACHINERY =11 YEARS | ||||||||||||
| AT VARIOUS LEVEL OF ANNUAL SAVINGS | ||||||||||||
| Rate | Discount Rate | 8% | 8% | 8% | 8% | 8% | 8% | 8% | 8% | 8% | ||
| Nper | Number of Years of Savings=Life of new machinery | 11 | 11 | 11 | 11 | 11 | 11 | 11 | 11 | 11 | ||
| Pmt | Annual Savings(Million dollars) | $4.40 | $8.80 | $11.00 | $4.60 | $9.20 | $11.50 | $5.00 | $10.00 | $12.50 | ||
| PV | Present Value of Annual Savings(Million dollars) | $31.41 | $62.82 | $78.53 | $32.84 | $65.68 | $82.10 | $35.69 | $71.39 | $89.24 | ||
| (Using PV function of excel) | ||||||||||||
| NPV=PV+IC | Net Present Value (PV-$10.8 million) ($ million) | $20.61 | $52.02 | $67.73 | $22.04 | $54.88 | $71.30 | $24.89 | $60.59 | $78.44 | ||
| CALCULATION OF PRESENT VALUE OF SAVINGS | ||||||||||||
| FOR LIFE OF NEW MACHINERY =14 YEARS | ||||||||||||
| AT VARIOUS LEVEL OF ANNUAL SAVINGS | ||||||||||||
| Rate | Discount Rate | 8% | 8% | 8% | 8% | 8% | 8% | 8% | 8% | 8% | ||
| Nper | Number of Years of Savings=Life of new machinery | 14 | 14 | 14 | 14 | 14 | 14 | 14 | 14 | 14 | ||
| Pmt | Annual Savings(Million dollars) | $4.40 | $8.80 | $11.00 | $4.60 | $9.20 | $11.50 | $5.00 | $10.00 | $12.50 | ||
| PV | Present Value of Annual Savings(Million dollars) | $36.27 | $72.55 | $90.69 | $37.92 | $75.85 | $94.81 | $41.22 | $82.44 | $103.05 | ||
| (Using PV function of excel) | ||||||||||||
| NPV=PV+IC | Net Present Value (PV-$10.8 million) ($ million) | $25.47 | $61.75 | $79.89 | $27.12 | $65.05 | $84.01 | $30.42 | $71.64 | $92.25 | ||
| CALCULATION OF PRESENT VALUE OF SAVINGS | ||||||||||||
| FOR LIFE OF NEW MACHINERY =17 YEARS | ||||||||||||
| AT VARIOUS LEVEL OF ANNUAL SAVINGS | ||||||||||||
| Rate | Discount Rate | 8% | 8% | 8% | 8% | 8% | 8% | 8% | 8% | 8% | ||
| Nper | Number of Years of Savings=Life of new machinery | 17 | 17 | 17 | 17 | 17 | 17 | 17 | 17 | 17 | ||
| Pmt | Annual Savings(Million dollars) | $4.40 | $8.80 | $11.00 | $4.60 | $9.20 | $11.50 | $5.00 | $10.00 | $12.50 | ||
| PV | Present Value of Annual Savings(Million dollars) | $40.14 | $80.27 | $100.34 | $41.96 | $83.92 | $104.90 | $45.61 | $91.22 | $114.02 | ||
| (Using PV function of excel) | ||||||||||||
| NPV=PV+IC | Net Present Value (PV-$10.8 million) ($ million) | $29.34 | $69.47 | $89.54 | $31.16 | $73.12 | $94.10 | $34.81 | $80.42 | $103.22 | ||
  |
Answer question
jeff jeffy answered 7 months agoRelated Solutions
The RW Company is proposing to replace its old welt-making machinery with more modern equipment. The...
The RW Company is proposing to replace its old welt-making
machinery with more modern equipment. The new equipment costs $9
million (the existing equipment has zero salvage value). The
attraction of the new machinery is that it is expected to cut
manufacturing costs from their current level of $8 a welt to $4.
However, as the following table shows, there is some uncertainty
both about future sales and about the performance of the new
machinery:
Pessimistic
Expected
Optimistic
Sales, millions...
Acer is contemplating to replace its old machinery with a new one. The cost of old...
Acer is contemplating to replace its old machinery with a new
one. The cost of old machinery is 960,000. The old machinery was
bought 6 years ago with a total useful life of 13 years.
If sold now, the old machinery can be salvaged at $17,000. The
existing machinery has the production capacity of 30,000 units.
Acer Inc.'s finished product is called Product X which can be sold
at $75, and has per unit variable cost of $42. The annual...
Ferris Industries is planning to replace its old equipment. The old equipment cost was $350 000...
Ferris Industries is planning to replace its old equipment.
The old equipment cost was $350 000 five years ago. The old
equipment is fully depreciated.
If the new equipment is purchased, arrangements will be made to
sell the old equipment. The old equipment is expected to be sold
for only $20 000 on 1 January 2021.
The new equipment will be placed in service on 1 January 2021.
The details regarding the proposal are as follows:
Expected acquisition cost $290...
Question 5: (24 marks) Ferris Industries is planning to replace its old equipment. The old equipment...
Question 5:
Ferris Industries is planning to replace its old equipment.
The old equipment cost was $350 000 five years ago. The old
equipment is fully depreciated.
If the new equipment is purchased, arrangements will be made to
sell the old equipment. The old equipment is expected to be sold
for only $20 000 on 1 January 2021.
The new equipment will be placed in service on 1 January 2021.
The details regarding the proposal are as follows:
Expected acquisition...
Your company is considering purchasing new machinery for the factory to upgrade and replace outdated equipment...
Your company is considering purchasing new machinery for the
factory to upgrade and replace outdated equipment that will cost $4
Million right away. The machinery is projected to last 6 years,
after which it can be sold for $500,000. The upgraded equipment
will be able to produce more product and result in additional sales
of $1.25 Million per year. Operating the new equipment will add
$200,000 per year in expenses. Additionally, a one-time expense of
$1.5 Million at the end...
ABC Company is considering the acquisition of a new piece of equipment to replace an old,...
ABC Company is considering the acquisition of a new piece of equipment to
replace an old, outdated machine currently used in its business operations.
The new equipment would cost $135,000 and is expected to last 9 years. The
new equipment would require a repair of $25,000 in year four and another
repair costing $80,000 in year eight. Purchasing this new equipment would
require an immediate investment of $30,000 in working capital which would
be released for investment elsewhere at the...
A company is considering whether to replace one of its construction equipment. • The existing equipment...
A company is considering whether to replace
one of its construction equipment.
• The existing equipment has a current cost of $15,000,
which declines by 20% each year for three years. The
operating cost for this equipment is $20,000 for year 1,
$8,000 for year 2, and $12,000 for year 3.
• The proposed equipment will cost $50,000, last five
years, and has a market value that declines by 20%
each year. The operating cost for the proposed
equipment is...
A firm is considering an investment of $480,000 in new equipment to replace old equipment with...
A firm is considering an investment of $480,000 in new
equipment to replace old equipment with a book value of $95,000 and
a market value of $63,000. If the firm replaces the old equipment
with new equipment, it expects to save $120,000 in operating costs
the first year. The amount of savings will grow at a rate of 8
percent per year for each of the following five years. Both pieces
of equipment belong to asset class 8, which has...
A firm is considering an investment of $480,000 in new equipment to replace old equipment with...
A firm is considering an investment of $480,000 in new equipment
to replace old equipment with a book value of $95,000 and a market
value of $63,000. If the firm replaces the old equipment with new
equipment, it expects to save $120,000 in operating costs the first
year. The amount of savings will grow at a rate of 8 percent per
year for each of the following five years. Both pieces of equipment
belong to asset class 8, which has...
A firm is considering an investment of $480,000 in new equipment to replace old equipment with...
A firm is considering an investment of $480,000 in new equipment
to replace old equipment with a book value of $95,000 and a market
value of $63,000. If the firm replaces the old equipment with new
equipment, it expects to save $120,000 in operating costs the first
year. The amount of savings will grow at a rate of 8 percent per
year for each of the following five years. Both pieces of equipment
belong to asset class 8, which has...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Discuss some examples of how motherboards and CPU combinations have evolved in the past 20 years....
- 16. What does HIRM provide to managers of health service delivery organizations? 17. What are the...
- Why do diamonds sell for such high prices? Why do pre-owned diamonds typically sell for such...
- The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to...
- Market Top Investors, Inc., is considering the purchase of a $350,000 computer with an economic life...
- As Tom Montgomery, how would you convince the De Beers Executive Committee to launch IIDV as...
- 1.2 Please give the example of the compensation package that you would like to provide to...
ADVERTISEMENT