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:   

Missing the wrong ones. Everything else is fine. Thanks

Option A Option B Initial investment $ 320,000 $ 454,000 Annual cash inflows 150,000 160,000 Annual cash outflows 70,000 75,000 Costs to rebuild 120,000 0 Salvage value 0 24,000 Estimated useful life 8 years 8 years

Missing the wrong ones. Everything else is fine. Thanks

Answer is complete but not entirely correct. Option A Table or Calculator Function: Present Value Annuity of $1 11 % Discount Factor Present Value Cash Flows Annual Cash Flows Cost to Rebuild Salvage Cash Flows 80,000 120,000) 5.1461 0.6587 411,688 (79,044) 307,356 (320,000) 12,644 Capital Investment Net Present Value Option B Table or Calculator Function: Present Value Annuity of $1 11 % Discount Factor Present Value Cash Flows Annual Cash Flows Cost to Rebuild Salvage Cash Flows 85,000 5.1461 437,419 0.4339 10,414 447,833 (454,000) 6,176 24,000 Capital Investment Net Present Value

Explanation / Answer

Option A: Cash flows Discount factor Present value Salvage 0 0 0 332644 Capital investment -320000 Net present value 12644 Option B: Cost to rebuild 0 0 0 Salvage 24000 0.4339 10414 447833 Capital investment -454000 Net present value -6167

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