Logan's Company is interested in purchasing a state-of-the-art machinery for its manufacturing plant. This new machine...

Logan's Company is interested in purchasing a state-of-the-art machinery for its manufacturing plant. This new machine will cost $100,000 and will have no salvage value at the end of its 5 year useful life. The projected net cash inflows for the 5 years are $32,000, $57,000, $5,000, $28,000, and $16,000. Logan's Company cost of capital rate is 10%.

a.) What is the payback period? Express your answer in 2 places after decimal.

b.)What is the net present value of this investment?

Solutions

Expert Solution

a) Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 3+ ( 6000 / 28000)

= 3.21 Years

Hence the correct answer is 3.21 Years

Year	Investment	Cash Inflow	Net Cash Flow
0	-1,00,000.00	-	-1,00,000.00	(Investment + Cash Inflow)
1	-	32,000	-68,000.00	(Net Cash Flow + Cash Inflow)
2	-	57,000	-11,000.00	(Net Cash Flow + Cash Inflow)
3	-	5,000	-6,000.00	(Net Cash Flow + Cash Inflow)
4	-	28,000	22,000.00	(Net Cash Flow + Cash Inflow)
5	-	16,000	38,000.00	(Net Cash Flow + Cash Inflow)

b) Net Present Value = Present Value of Cash inflows - Present Value of Cash outflows

= $ 32,000 * 1/(1.10) ^ 1 + $ 57,000* 1/(1.10) ^2 + $ 5,000* 1/(1.10) ^3 + $ 28,000* 1/(1.10) ^4 + $ 16,000* 1/(1.10) ^5 - $ 100,000

= $ 9,014.04

Hence the correct answer is $ 9,014.04

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

a) Hank Co. recently opened a new state of the art, high tech manufacturing plant, and...

a) Hank Co. recently opened a new state of the art, high tech manufacturing plant, and management made the decision to install a just in time production system. How would labor costs, overhead costs and work in process inventory levels at this plant respectively compare with those at other Fulton facilities? a. lower, higher, higher b. lower, lower, lower c. lower, higher, lower d. higher, higher, higher e. higher, lower, higher b) Crystal Industries began June with a finished good...

A manufacturing plant bought a new machine to package its product. After some testing, the plant...

A manufacturing plant bought a new machine to package its product. After some testing, the plant supervisor decided that the packages needed about 300 packing peanuts to keep the product safe. She set the new machine to dispense the peanuts into each box but wanted to test to make sure the machine was operating correctly. She ran the machine 20 times and counted the number of packing peanuts dispensed. The plant conducts a one-mean hypothesis at the 5% significance level,...

A Vehicle Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art robotic machine....

A Vehicle Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art robotic machine. They have compiled the following data for the new machine: Cost of new machine needed $150,000 Annual net cash inflows $40,000 Salvage value of the machine in 10 years .$20,000 Useful life of the machine 10 years Required rate of return 10% The company uses straight-line depreciation on all equipment. a. What is the payback period for this machine? Ignore the impact of income taxes. b. How...

A manufacturing corporation has installed a plant and machinery in its factory as on 5th January,...

A manufacturing corporation has installed a plant and machinery in its factory as on 5th January, 2018. The purchase price of that plant and machinery was OMR 220,000 and on this price 8% of trade discount was included and 5% of rebates were included after deducting the trade discount. Initial delivery cost was OMR 12,500 in that 20% of which was handling cost of the whole machinery in the factory building. Cost of testing was OMR 7,500, professional fees to...

Facebook is considering purchasing a new state-of-the-art server farm (several large computers) that would allow the...

Facebook is considering purchasing a new state-of-the-art server farm (several large computers) that would allow the company to match customers’ pictures to advertisers. The company estimates this new service will generate additional advertising revenues of $6 million at the end of the first year, and of $7 million at the end of the second year. Working capital requirements increase by $3 million at the end of year 1. After 2 years, Facebook expects to sell the servers and generate a...

A company is considering purchasing a new machine that would cost $60,000 and the machine would...

A company is considering purchasing a new machine that would cost $60,000 and the machine would be depreciated (straight line) down to $0 over its four year life. At the end of four years it is believed that the machine could be sold for $12,000. The machine would increase EBDT by $42,000 annually. the company's marginal tax rate is 34%. What the RATFCF’s associated with the purchase of this machine? $31,800 $32,820 $30,452 $29,940

Required: A manufacturing company holds large amounts of factory machinery on its balance sheet. The machinery...

Required: A manufacturing company holds large amounts of factory machinery on its balance sheet. The machinery is custom built using specifications that make it unsuitable for use in any other location. For this reason it is unlikely that there could exist a resale market for this machinery. Discuss: two advantages of using historical cost to measure this machinery. (2.5 marks) two advantages of using the revaluation model to measure this machinery. (2.5 marks)

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...

What the NPV of purchasing a new plant for £70m that will turn its first profit...

What the NPV of purchasing a new plant for £70m that will turn its first profit of £10m in year 4, after which cash flow will grow at a 2% rate per year, if the cost of capital is 8%?

Mystic Beverage Company is considering purchasing a new bottling machine. The new machine costs $165,124, plus...

Mystic Beverage Company is considering purchasing a new bottling machine. The new machine costs $165,124, plus installation fees of $13,539 and will generate earning before interest and taxes of $84,143 per year over its 6-year life. The machine will be depreciated on a straight-line basis over its 6-year life to an estimated salvage value of 0. Mystic’s marginal tax rate is 0%. Mystic will require $27,354 in NWC if the machine is purchased. Determine the annual cash flow in year...

Subjects