Question
In: Finance
Managers of Coronado Embroidery have decided to purchase a new monogram machine and are considering two...
Managers of Coronado Embroidery have decided to purchase a new monogram machine and are considering two alternative machines. The first machine costs $114,000 and is expected to last five years. The second machine costs $182,000 and is expected to last eight years. Assume that the opportunity cost of capital is 8 percent. What is the equivalent annual cost for each system? (Do not round intermediate calculations. Round final answers to 2 decimal places, e.g. 2.75.) Equivalent Annual Cost First machine $ Second machine $ Which machine should Coronado Embroidery purchase? Coronado Embroidery should purchase the machine.
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Expert Solution
| Machine 1 | ||||||
| Discount rate | 8.000% | |||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Cash flow stream | -114000.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 |
| Discounting factor | 1.000 | 1.080 | 1.166 | 1.260 | 1.360 | 1.469 |
| Discounted cash flows project | -114000.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 |
| NPV = Sum of discounted cash flows | ||||||
| NPV Machine 1 = | -114000.00 | |||||
| Where | ||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
| Discounted Cashflow= | Cash flow stream/discounting factor | |||||
| Equvalent annuity(EAA)= | -28552.04 | |||||
| Required rate = | 8.000% | |||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Cash flow stream | 0.00 | -28552.04 | -28552.04 | -28552.04 | -28552.04 | -28552.04 |
| Discounting factor | 1.000 | 1.080 | 1.166 | 1.260 | 1.360 | 1.469 |
| Discounted cash flows project | 0.000 | -26437.070 | -24478.769 | -22665.527 | -20986.599 | -19432.036 |
| Sum of discounted future cashflows = | -114000.00 | |||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
| Discounted Cashflow= | Cash flow stream/discounting factor | |||||
| Machine 2 | |||||||||
| Discount rate | 8.000% | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
| Cash flow stream | -182000.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 |
| Discounting factor | 1.000 | 1.080 | 1.166 | 1.260 | 1.360 | 1.469 | 1.587 | 1.714 | 1.851 |
| Discounted cash flows project | -182000.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 |
| NPV = Sum of discounted cash flows | |||||||||
| NPV Machine 2 = | -182000.00 | ||||||||
| Where | |||||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||||||
| Discounted Cashflow= | Cash flow stream/discounting factor | ||||||||
| Equvalent annuity(EAA)= | -31670.69 | ||||||||
| Required rate = | 8.000% | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
| Cash flow stream | 0.00 | -31670.69 | -31670.69 | -31670.69 | -31670.69 | -31670.69 | -31670.69 | -31670.69 | -31670.69 |
| Discounting factor | 1.000 | 1.080 | 1.166 | 1.260 | 1.360 | 1.469 | 1.587 | 1.714 | 1.851 |
| Discounted cash flows project | 0.000 | -29324.710 | -27152.509 | -25141.212 | -23278.900 | -21554.537 | -19957.905 | -18479.541 | -17110.686 |
| Sum of discounted future cashflows = | -182000.00 | ||||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||||||
| Discounted Cashflow= | Cash flow stream/discounting factor | ||||||||
Choose Machine 1 as it has lower EAC
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