9-2 Whispering Winds Vita produces a wide range of herbal supplements sold natio

Question

9-2 Whispering Winds Vita produces a wide range of herbal supplements sold nationwide through in the is considering the purchase of a new packaging machine to replace the seven-year-old machine currently in use. The new machine will cost $172,550, and installation will require an operate the new machine is $11.35 per carton $3,200. The machine has a useful life of 10 years and is expected to have a salvage value of $3,835 at that time. The variable cost to to the current machine's variable cost of $11.42 per carton, and Whispering Winds Vita expects to pack 255,000 cartons each year. If the new machine is purchased, Whispering Winds Vita will avoid a required $11,175 overhaul of the current machine in four years. The current machine has a market value of $12,925 Identify the amount and timing of all cash flows related to the acquisition of the new packaging machine. (Enter negative amounts using a negative sign preceding the Salvage of old equipment Salvage of new equipment

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Exercise 9.2 Cash Flow Timing Amount Remarks Purchase Price 0 -172250 Purchasing being done NOW Installation 0 -3200 Intallation being done NOW Salvage of old equipment 0 12925 Old machine will be sold NOW Salvage of New equipment 10 3835 Salvage value is after 10 year Variable Cost Savings (255000*(11.42-11.35) 1-10 17850 Cost wil be saved during 10 years Avoidable Overhaul 4 11175 Repair is scheduled in year 4 a. Required Rate of Return 12% For the lawnmower to be acceptable using the net present value method, the net presentvalue must be greater than or equal to zero.Let x equal the present value of the annualcash savings: Let x equal the present value of the annualcash savings (x*PVA 6 year 12%)-8266=0 4.1114x=8266 x=8266/4.1114 x=2010 Annual Saving should be $2010 or more than this PV Working: Year PV 1 0.8929 2 0.7972 3 0.7118 4 0.6355 5 0.5674 6 0.5066 4.1114 b. Required Rate of Return 13% For the lawnmower to be acceptable using the net present value method, the net presentvalue must be greater than or equal to zero.Let x equal the present value of the annualcash savings: Let x equal the present value of the annualcash savings (x*PVA 6 year 13%)-8266=0 4.1114x=8266 x=8266/3.9975 x=2068 Annual Saving should be $2010 or more than this PV Working: Year PV 1 0.8850 2 0.7831 3 0.6931 4 0.6133 5 0.5428 6 0.4803 3.9975

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