Filkins Fabric Company is considering the replacement of its old, fully deprecia
ID: 2715587 • Letter: F
Question
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 $225,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $95,000 per year; and Machine 360-6, which has a cost of $375,000, a 6-year life, and after-tax cash flows of $104,500 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 10%. Calculate the two projects' NPVs. Round your answers to the nearest cent.
b) By how much would the value of the company increase if it accepted the better machine? Round your answer to the nearest cent.
c) What is the equivalent annual annuity for each machine? Round your answer to the nearest cent.
Explanation / Answer
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 $225,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $95,000 per year; and Machine 360-6, which has a cost of $375,000, a 6-year life, and after-tax cash flows of $104,500 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 10%. Calculate the two projects' NPVs. Round your answers to the nearest cent.
b) By how much would the value of the company increase if it accepted the better machine? Round your answer to the nearest cent.
c) What is the equivalent annual annuity for each machine? Round your answer to the nearest cent.
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 $225,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $95,000 per year; and Machine 360-6, which has a cost of $375,000, a 6-year life, and after-tax cash flows of $104,500 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 10%. Calculate the two projects' NPVs. Round your answers to the nearest cent.
b) By how much would the value of the company increase if it accepted the better machine? Round your answer to the nearest cent.
c) What is the equivalent annual annuity for each machine? Round your answer to the nearest cent.
Machine 190-3 Year Cash Flows PV @ 10% Present Value 0 -$225,000 1 -$225,000 1 95,000 0.9091 $86,363.64 2 95,000 0.8264 $78,512.40 3 95,000 0.7513 $71,374.91 NPV $11,250.94 Machine 360-6 Year Cash Flows PV @ 10% Present Value 0 -$375,000.00 1 -$375,000.00 1 $104,500.00 0.9091 $95,000.00 2 $104,500.00 0.8264 $86,363.64 3 $104,500.00 0.7513 $78,512.40 4 $104,500.00 0.6830 $71,374.91 5 $104,500.00 0.6209 $64,886.28 6 $104,500.00 0.5645 $58,987.53 NPV $80,124.74 Machine 360-6 would be selected because it has highest NPV. Equivalent annual annuity for each machine Machine 190-3 Rate 10% Nper 3 Present Value (PV) $11,250.94 Future Value(FV) 0 PMT = EAA(calculated in Excel) $4,524.17 Machine 360-6 Rate 10% Nper 6 Present Value (PV) $80,124.74 Future Value(FV) 0 PMT = EAA(calculated in Excel) $18,397.23Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.