Delightful Dance Company, a manufacturer of dance and exercise apparel, is consi
ID: 2706600 • Letter: D
Question
Delightful Dance Company, a manufacturer of dance and exercise apparel, is considering the purchase of one of the two pieces of equipment. The following information is given.
Machine Bravo Machine Delta
Cost.....$100,000 Cost.....$150,000
One time training costs...$25,000 Installation cost.....$20,000
Useful life five years Useful life five years
After tax sale proceeds After tax sale proceeds
at the end of year 5.........$30,000 at the end of year 5......$0
An additional overhaul maintenance
after tax cost of $16,000 at the end
of year three not included below.
Operating cash flows*
Machine Bravo Machine Delta
Year 1.....$160,000 Year 1......$130,000
Year 2.....$125,000 Year 2......$150,000
Year 3.....$110,000 Year 3......$150,000
Year 4.....$ 90,000 Year 4......$175,000
Year 5.....$ 90,000 Year 5......$175,000
* Operating cash flows are after expenses, depreciation and taxes.
Delightful Dance Company has a WACC of 9% and therefore uses this as their discount rate.
Requirements:
1. Determine the initial investment in Machine A.
2. Determine the initial investment in Machine B.
3. Compute the net present value of Machine A.
4. Compute the net present value of machine B.
5. Which machine should Delightful purchase?
Explanation / Answer
Delightful Dance Company, a manufacturer of dance and exercise apparel, is consi
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