Unequal Lives Filkins Fabric Company is considering the replacement of its old,
ID: 2640254 • Letter: U
Question
Unequal Lives
Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $220,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $97,000 per year; and Machine 360-6, which has a cost of $320,000, a 6-year life, and after-tax cash flows of $93,400 per year. Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines.
Assume that Filkins' cost of capital is 12%. Calculate the two projects' NPVs. Round your answers to the nearest cent.
Machine 190-3 $
Machine 360-6 $
Should the firm replace its old knitting machine, and, if so, which new machine should it use?
-Select-Yes. Machine 190-3Yes. Machine 360-6NoItem 3
By how much would the value of the company increase if it accepted the better machine? Round your answer to the nearest cent.
$
What is the equivalent annual annuity for each machine? Round your answer to the nearest cent.
Machine 190-3 $ Machine 360-6 $Explanation / Answer
The company should go for overhead Machine 360-6 due to higher NPV, IRR and MIRR.
PVIF Machine 190-3 PV 1 -220000 -220000 0.892857 97000 86607.14 0.797194 97000 77327.81 0.71178 97000 69042.68 NPV 12977.63 IRR 15.40% MIRR 14.16% PVIF Machine 360-6 PV 1 -320,000 -320000 0.892857 93400 83392.86 0.797194 93400 74457.91 0.71178 93400 66480.28 0.635518 93400 59357.39 0.567427 93400 52997.67 0.506631 93400 47319.35 NPV 64005.44 IRR 18.81% MIRR 16.43%Related Questions
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