Question
In: Statistics and Probability
A company has to choose between two new machines, the Alpha and the Beta. Both machines...
A company has to choose between two new machines, the Alpha and the Beta. Both machines would cost $30 000 and have an expected lifetime of 4 years. Estimates of the
annual cash inflows which each machine would generate are given below
|
Machine |
Year |
0 |
1 |
2 |
3 |
4 |
|
Alpha |
Cash flow |
-$30,000 |
$14,000 |
$15,000 |
$15,000 |
$14,000 |
|
Beta |
Cash flow |
-$30,000 |
$8,000 |
$13,000 |
$15,000 |
$21,500 |
The company staff decides that 12% is an appropriate discount rate.
- Find the net present value (NPV) of both projects.
- Which project would you invest in? What does your answer depend on?
Solutions
Expert Solution
a)
NPV is calculated as follows
PV = cash flow / (1 + r)ⁿ
Setting this in Excel
| Rate | 0.12 | ||||
| Machine | Alpha | Beta | |||
| Year | Cash flow | Present Value | Cash flow | Presenet Value | |
| 0 | ($30,000) | ($30,000) | ($30,000) | ($30,000) | |
| 1 | $14,000 | $12,500.00 | $8,000 | $7,142.86 | |
| 2 | $15,000 | $11,957.91 | $13,000 | $10,363.52 | |
| 3 | $15,000 | $10,676.70 | $15,000 | $10,676.70 | |
| 4 | $14,000 | $8,897.25 | $21,500 | $13,663.64 | |
| Net Present Value | $14,032 | $11,847 |
Excel sheet is
and the formula applied is
So, the NPV of alpha = $14,031.86
and NPV of Beta = $11,846.72
b)
I would invest in Project alpha as the NPV of alpha is greater than that of Beta
orchestra answered 2 years agoRelated Solutions
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0
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11,400
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2
3
4
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Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated...
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managers of both divisions are evaluated based on their own
division’s return on investment (ROI). Assume the following
information relative to the two divisions:
Case
1
2
3
4
Alpha Division:
Capacity in units
51,000
298,000
109,000
195,000
Number of units now being sold to
outside customers
51,000
298,000
84,000
195,000
Selling price per unit to outside
customers
$
99
$
42
$
70
$
47
Variable costs per unit...
Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated...
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managers of both divisions are evaluated based on their own
division’s return on investment (ROI). Assume the following
information relative to the two divisions:
Case
1
2
3
4
Alpha Division:
Capacity in units
58,000
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Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated...
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division’s return on investment (ROI). Assume the following
information relative to the two divisions:
Case
1
2
3
4
Alpha Division:
Capacity in units
57,000
319,000
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Number of units now being sold to
outside customers
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319,000
84,000
205,000
Selling price per unit to outside
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$
68
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2
3
4
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Capacity in units
55,000
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$
102
$
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$
62
$
47
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2
3
4
Alpha Division:
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50,000
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3
4
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$
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$
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$
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