**Drop down 1 : 18% discount rate, 14% cost of capital, rate higher than 18%,or
ID: 2426728 • Letter: #
Question
**Drop down 1 : 18% discount rate, 14% cost of capital, rate higher than 18%,or rate lower than 14%
Drop down 2 :contemporary technology is preferred or traditional equipment is preferred
Discount Rates, Quallty, Market Share, Contemporary Manuracturing Environmen Sweeney Manufacturing has a plant where the equipment is essentially worn out. The equipment must be replaced, and Sweeney is considering two competing investment alternatives. The first alternative would replace the worn-out equipment with traditional production equipment; the second alternative uses contemporary technology and has computer-aided design and manufacturing capabilities. The investment and after- tax operating cash flows for each alternative are as follows: Traditional Contemporary Year Equipment Technology (999,400) $(3,996,050) 205,800 400,750 605,950 801,100 801,100 801,100 1,007,200 2,004,800 2,004,800 2,004,800 602,700 405,400 195,250 195,250 195,250 195,250 195,250 195,250 195,250 195,250 4 7 8 9 10 The company uses a discount rate of 18 percent for all of its investments. The company's cost of capital is 14 percent. The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems Required: 1. Calculate the net present value for each investment using a discount rate of 18 percent. Round intermediate calculations and your final answer to the nearest dollar. If the NPV is negative, enter your answer as a negative value. NPV Traditional equipment Contemporary technology 2. Calculate the net present value for each investment using a discount rate of 14 percent. Round intermediate calculations and the final answer to the nearest dollan NPV Traditional equipment Contemporary technologyExplanation / Answer
1) NPV at 18% discount rate Traditional Contemporary Year Traditional Contemporary Discount 18% Disc cashflow Disc cashflow 0 (999,400) (3,996,050) 1 (999,400) (3,996,050) 1 602,700 205,800 0.84745 510,758 174,405 2 405,400 400,750 0.71818 291,150 287,811 3 195,250 605,950 0.60863 118,835 368,799 4 195,250 801,100 0.51578 100,706 413,191 5 195,250 801,100 0.4371 85,344 350,161 6 195,250 801,100 0.37043 72,326 296,751 7 195,250 1,007,200 0.31392 61,293 316,180 8 195,250 2,004,800 0.26603 51,942 533,337 9 195,250 2,004,800 0.22545 44,019 451,982 10 195,250 2,004,800 0.19106 37,304 383,037 NPV 374,278 (420,395) 2) NPV at 14% discount rate Traditional Contemporary Year Traditional Contemporary Discount 14% Disc cashflow Disc cashflow 0 (999,400) (3,996,050) 1 (999,400) (3,996,050) 1 602,700 205,800 0.87719 528,682 180,526 2 405,400 400,750 0.76946 311,939 308,361 3 195,250 605,950 0.67497 131,788 408,998 4 195,250 801,100 0.59208 115,604 474,315 5 195,250 801,100 0.51936 101,405 416,059 6 195,250 801,100 0.45558 88,952 364,965 7 195,250 1,007,200 0.39963 78,028 402,507 8 195,250 2,004,800 0.35055 68,445 702,783 9 195,250 2,004,800 0.3075 60,039 616,476 10 195,250 2,004,800 0.26974 52,667 540,775 NPV 538,149 419,715 3) company should use 14% discount rate 4) Traditional Year Traditional Discount 14% Disc cashflow 0 (999,400) 1 (999,400) 1 602,700 0.87719 528,682 2 405,400 0.76946 311,939 3 97,625 0.67497 65,894 4 97,625 0.59208 57,802 5 97,625 0.51936 50,703 6 97,625 0.45558 44,476 7 97,625 0.39963 39,014 8 97,625 0.35055 34,222 9 97,625 0.3075 30,020 10 97,625 0.26974 26,333 NPV 189,685 5) Purchase Traiditional equipment
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