PAGE3 7. The Savage Company epecializes in decorative fruit baskets. Current- ly

Question

PAGE3 7. The Savage Company epecializes in decorative fruit baskets. Current- ly, the company is analyzing purchase alternatives for a fruit- polishing machine. Data relevant to the decision are shown: P. V. Facto] Cost Useful 11fe Salvage value Botimated annual net cash flow 11,000 27,000 10 years 1,000 . $24,000 10 years 2,000 9,5004 909 826 751 683 621 .564 .513 467 425 Present value multipliers @ 10%,-. 0.386 Dollar received at the end of ten yeare Dollar received at the end of each of the next ten years 6.145 10 6.145 Required: a. Compute the payback period for each of the alternatives b. Using the present value method, prepare an analysis to determine which machine the company should purchase. (The company uses a 10% minimum desired rate of return.)

Explanation / Answer

a. Payback period = Initial cost / Annual net cash flows Machine L: $27000 / $11000 = 2.45 years Machine C: $24000 / $9500 = 2.53 years b. Net Present Value Machine L: -27000 + (11000 x 6.145) + (1000 x 0.386) = -27000 + 67595 + 386 = $40981 Machine C: -24000 + (9500 x 6.145) + (2000 x 0.386) = -24000 + 58377.50 + 772 = $35149.50 The company should purchase Machine L which has a higher net present value.

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