Question

The Templeton Manufacturing and Distribution Company of? Tacoma, Washington, is contemplating the purchase of a new conveyor belt system for one of its regional distribution facilities. Both alternatives will accomplish the same task but the Eclipse Model is substantially more expensive than the Sabre Model and will not have to be replaced for 10? years, whereas the cheaper model will need to be replaced in just 5 years. The costs of purchasing the two systems and the costs of operating them annually over their expected lives is provided? below:??

Year   Eclipse   Sabre
0   $(1,300,000)   $(700,000)
1   $(23,000)   $(55,000)
2   $(29,000)   $(55,000)
3   $(29,000)   $(63,000)
4   $(29,000)   $(63,000)
5   $(39,000)   $(82,000)
6   $(39,000)  
7   $(39,000)  
8   $(39,000)  
9   $(39,000)  
10   $(39,000)   

a.??Templeton typically evaluates investments in plant improvements using a required rate of return of 10%. What are the NPVs for the two? systems?

b.??Calculate the equivalent annual costs for the two systems.

c.??Based on your analysis of the two systems using both their NPV and? EAC, which system do you recommend the company? pick? ? Why?

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

NPV of Eclipse:

NPV of Sabre:

B) EACC = PV of Net Outflows / PVAF (r%, n)

Eclipse:

Sarbe:

C)

Eclipse is advicable as it is having less EACC compared to Sarbe.