PLEASE ANSWER ALL 4 QUESTIONS FOR ALL THE POINTS THANKS!!! Mayfair Metals Compan

Question

PLEASE ANSWER ALL 4 QUESTIONS FOR ALL THE POINTS THANKS!!!

Mayfair Metals Company is considering the replacemnt of its old, fully depreciated pressing machine. Two new models are available: Machine A, which has a cost of $165,000, a 4-year expected life, and after-tax cash flows (labor savings and depreciation) of $76,500 per year; and Machine B, which has a cost of $310,000, an 8-year life, and after-tax cash flows of $83,400 per year. Pressing machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Majestic's cost of capital is 12%. Answer each of the questions presented below. including any computations.

#1: Should the firm replace its old pressing machine? Explain.

#2: If the firm is to replace its old pressing machine, which new machine should it use? Explain.

#3: What is the equivalent annual annuity for Machine A? Show your work below and round your answer to the nearest cent.

#4: What is the equivalent annual annuity for each machine 360-6? Show your work below and round your answer to the nearest cent.

Thank-you!

Explanation / Answer

Dep using SLN for Mac A = 165000/4 = $41,250

SO Net CF = 76500+Dep = 76500+$41,250 = $117,750

NPV of MAch A = NPV(Rate,CF1..CF4) + CF0

ie NPV = NPV(12%,117750,117750,117750,117750) - 165000

ie NPV(A) = $192,648

So EAA (A)= Rate*NPV/(1-(1+Rate)^(-n))

ie EAA(A) = 12%*192648/(1-(1+12%)^(-4))

= $63,426.36 ..(A)

Putting the variables of the 15 year project into the equivalent annual annuity formula shows

Dep using SLN for Mac B= 310000/8 = $38,750

SO Net CF = 83400+Dep = 83400+$38,750 = $122,150

NPV of MAch B = NPV(Rate,CF1..CF4) + CF0

ie NPV = NPV(12%,122150,122150,122150,122150,122150,122150,122150,122150) - 310000

ie NPV(B) =$296,797

So EAA(B) = Rate*NPV/(1-(1+Rate)^(-n))

ie EAA(B) = 12%*296797/(1-(1+12%)^(-8))

=$59,746.08 ..(B)

1. Firm should replace its Old pressing machine as replacement cost is not expected to change. Also it is fully depreciated so its book value is zero. So There s no tax shield available.

2. Based on findings A & B, Machine A should be used as it has higher EAA in 4 yrs as compared to B which has lower EAA spread over 8 Yrs.

3. EAA of Machine A calucltaion is shown above.

4. EAA of Machine A & B is calculated above.

Comparing these two Machines, the 4 year Machne will return a higher amount relative to the time of the investment. Although the 8 year MAchinie project has a higher NPV, the 4 year Machne price can be reinvested and have additional earnings for the next 4 years that remain on the 8 year Press Life cycle.

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