Question

Your boss asks you to evaluate the purchase of a new battery-operated toaster for his restaurant chain. The toaster [ BT ] costs $9 per unit, and has an estimated useful life of five years. The toaster requires batteries once a week yielding an annual operating cost of $140 per year; salvage value of both toaster and batteries is zero. The alternative is to purchase an electric toaster [ ET ] that will last ten years and costs $50. The estimated annual electric bill for this toaster is $130, and it has an expected salvage value of $20.

1.  If the company anticipates purchase of 4000 toasters for eternity, which model should you recommend? (Assume a tax rate of 30% and a WACC of 12%.

A) BT: AEC $97.55 B) ET: AEC $97.55 C) none of them D) ET: AEC $99.96 E) BT: AEC $99.96

2. If toaster BT's annual battery costs decrease by $6 and ET's annual electric costs increase by $6 which toaster would you recommend now?

A) BT: AEC $95.23 B) ET: AEC $95.76 C) ET: AEC $95.23 D) BT: AEC $95.76 E) none of them

3. If toaster BT's annual battery costs increase by $6 and ET's toaster cost increase by $6 which toaster would you recommend now?

A) BT: AEC $98.43 B) none of them C) BT: AEC $104.23 D) ET: AEC $98.43 E) ET: AEC $104.23

Answer 1

1). As per the calculations of NPV, Battery operated Toaster must be opted by the company.

2). If annual battery cost decrease by $6 and annual electric cost increase by $6, Battery operated toaster are still better.

3). If Annual battery costs increase by $6 and electric costs reduce by $6, then elctric toaster are beneficials because here the NPV of Electric toasters is lower.