A company has to buy a new gadget maker and must choose between 2 options. The...

A company has to buy a new gadget maker and must choose between 2 options.

The first gadget maker costs $400,000, and will need maintenance of $225,000 at the end of the fifth year. The salvage value after 10 years will be $175,000.

The second option costs $250,000 and will require annual maintenance of $30,000 each year for 10 years. At the end of 10 years, the salvage value will be $75,000.

Which gadget maker should the firm select if interest is 8.5% compounded annually?

*Can you please show formulas used.

Expert Solution

Calculation of Present Worth of Gadgets
Year	First Gadget	Second Gadget
Cash Flows	Discount Factor @8.5%	Discounted Cash Flows	Cash Flows	Discount Factor @8.5%	Discounted Cash Flows
A	B	C = 1/(1+8.5%)^A	*D = BC**	E	F = 1/(1+8.5%)^A	*G = EF**
0	-400000	1	-400000	-250000	1	-250000
1	0	0.921658986	0	-30000	0.921658986	-27649.76959
2	0	0.849455287	0	-30000	0.849455287	-25483.6586
3	0	0.782908098	0	-30000	0.782908098	-23487.24295
4	0	0.721574284	0	-30000	0.721574284	-21647.22853
5	-225000	0.665045423	-149635.2202	-30000	0.665045423	-19951.3627
6	0	0.612945091	0	-30000	0.612945091	-18388.35272
7	0	0.564926351	0	-30000	0.564926351	-16947.79052
8	0	0.520669448	0	-30000	0.520669448	-15620.08343
9	0	0.479879675	0	-30000	0.479879675	-14396.39026
10	175000	0.442285415	77399.94763	45000	0.442285415	19902.84368
PW			-472235.2726			-413669.0356
PW of First Gadget is -$472,235.27
PW of Second Gadget is -$413,669.04
Therefore, it is better to choose second gadget since PW of second gadget is lower than PW of first gadget

jeff jeffy answered 2 years ago

National Paper Company must purchase a new machine for producing cardboard boxes. The company must choose...

National Paper Company must purchase a new machine for producing cardboard boxes. The company must choose between two machines. The machines produce boxes of equal quality, so the company will choose the machine that produces (on average) the most boxes. It is known that there are substantial differences in the abilities of the company's machine operators. Therefore National Paper has decided to compare the machines using a paired difference experiment. Suppose that eight randomly selected machine operators produce boxes for...

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...

Suppose you want to buy a new car and trying to choose between two models: Model...

Suppose you want to buy a new car and trying to choose between two models: Model A: costs $17,000 and its gas mileage is 20 miles per gallon and its insurance is $200 per year. Model B: costs $25,000 and its gas mileage is 35 miles per gallon and its insurance is $400 per year. If you drive approximately 40,000 miles per year and the gas costs $3 per gallon: Find a formula for the total cost of owning Model...

A. Assume Charlie lives for two periods and must choose between two options. Option 1: Do not attend school...

A. Assume Charlie lives for two periods and must choose between two options. Option 1: Do not attend school at all and work in both periods at a salary of $20,000 per period. Option 2: Attend school in the first period incurring $5,000 in direct schooling costs, then in the second period work at a salary of $45,000. Assume the discount rate between periods is 5 %. Which option will Charlie choose to pursue? B. State whether the below is True or False, then explain your reasoning. When...

03) (30 pts) Suppose a company must choose between two projects (A and B) with the...

03) (30 pts) Suppose a company must choose between two projects (A and B) with the following characteristics: Project A Project B Cost of equipment (investment) $770,000 0 Working capital (investment) 0 $710,000 Cash flow (year 2) $200,000 $250,000 Cash flow (year 3) $270,000 $250,000 Cash flow (year 4) $270,000 $250,000 Cash flow (year 5) $300,000 $250,000 Assume an effective rate of 6% per year. Calculate the NPV for each alternative. Which project should the company choose and why?

a firm must choose between two mutually exclusive projects, a & b. project a has an...

a firm must choose between two mutually exclusive projects, a & b. project a has an initial cost of $10000. its projected net cash flows are $800, $2000, $3000, $4000, and $5000 at the end of years 1 through 5, respectively. project b has an initial cost of $14000, and its projected net cash flows are $7000, $5000, $3000, $2000, and $1000 at the end of years 1 through 5, respectively. the firm’s cost of capital is 6.00%. choose the...

A firm must choose between two mutually exclusive projects, A & B. Project A has an...

A firm must choose between two mutually exclusive projects, A & B. Project A has an initial cost of $11000. Its projected net cash flows are $900, $2000, $3000, $4000, and $5000 at the end of years 1 through 5, respectively. Project B has an initial cost of $15000, and its projected net cash flows are $7000, $5000, $3000, $2000, and $1000 at the end of years 1 through 5, respectively. At what cost of capital would the firm be...

Question 2 (20 marks) You must evaluate a proposal to buy a new milling machine with...

Question 2 You must evaluate a proposal to buy a new milling machine with purchase price of $150,000. The machine will be depreciated to zero value over the 4 years using prime cost (straight line) method. The machine would be sold after 4 years for $70,000. Inventory will increase by $17,000 and account payables will rise by $7,500. All other working capital components will stay the same, so the change in net working capital is $9,500. The managers expect to...

You must select between two options that have a MARR of 12%. Option Red has an...

You must select between two options that have a MARR of 12%. Option Red has an initial cost of $50,000 and annual benefits of $13,000 for the next six years. Option Blue has an initial cost of $70,000 and annual benefits of $15,250 for the next eight years. State here on Blackboard what option should be selected using an incremental ROR analysis. You must also state here on Blackboard the increment rate of return (in percent to 2 decimal places...

Colorado Springs Technology must choose between two methods of producing a new product. The initial costs...

Colorado Springs Technology must choose between two methods of producing a new product. The initial costs and year-end cash flow are as follows: Year 0 1 2 3 4 5 Method A --$1,000,000 210,000 250,000 300,000 525,000 600,000 Method B --$1,000,000 410,000 375,000 475,000 225,000 195,000 The company’s WACC is 10 percent. Calculate the NPV, IRR & MIRR for each method.

Question