Tulsa Company is considering investing in new bottling equipment and has two opt

Question

Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa's cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa's controller: Calculate NPV. (Future Value of $1. Present Value of $1. Future Value Annuity of $1. Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided.)

Explanation / Answer

SOLUTION :

Option A

Cash flow

Discount factor

Present value

Annual cash flow

80000

5.146122761

       411,689.82

cost to rebuild

-120000

0.658730974

-       79,047.72

salvage

0

                        -  

       332,642.10

capital investment

-     320,000.00

NPV

         12,642.10

Option B

Cash flow

Discount factor

Present value

Annual cash flow

85000

5.146122761

       437,420.43

cost to rebuild

0

                        -  

salvage

24000

0.433926496

         10,414.24

       447,834.67

capital investment

-     454,000.00

NPV

-          6,165.33

Year

Discount factor @ 11%

1

0.900900901

2

0.811622433

3

0.731191381

4

0.658730974

5

0.593451328

6

0.534640836

7

0.481658411

8

0.433926496

5.146122761

Option A

Cash flow

Discount factor

Present value

Annual cash flow

80000

5.146122761

       411,689.82

cost to rebuild

-120000

0.658730974

-       79,047.72

salvage

0

                        -  

       332,642.10

capital investment

-     320,000.00

NPV

         12,642.10

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