11.William Brown is evaluating two new business opportunities. Each of the opportunities shown below has a 15-year life. William uses a 12% discount rate.
Option 1 Option 2
Equipment purchase and installation $71,200 $82,800
Annual cash flow $29,000 $31,130
Equipment overhaul in year 6 -$4,710
Equipment overhaul in year 8 -$5,730
(a)Calculate the net present value of the two opportunities. (Round present value factor calculations to 4 decimal places, e.g. 1.2514 and the final answers to 0 decimal places, e.g. 59,991.)Option 1 Option2
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(b) Calculate the profitability index of the two opportunities. (Round answers to 2 decimal places, e.g. 15.25.)Option 1 Option 2
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(c) Which option should William choose?William should choose select an option Option 1 or Option 2
12.Flint Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $95,000 for the machine, which was state of the art at the time of purchase. Although the machine will likely last another ten years, it will need a $12,000 overhaul in four years. More important, it does not provide enough capacity to meet customer demand. The company currently produces and sells 9,000 frames per year, generating a total contribution margin of $92,500.Martson Molders currently sells a molding machine that will allow Flint Pix to increase production and sales to 12,000 frames per year. The machine, which has a ten-year life, sells for $138,000 and would cost $14,000 per year to operate. Flint Pix’s current machine costs only $8,000 per year to operate. If Flint Pix purchases the new machine, the old machine could be sold at its book value of $5,000. The new machine is expected to have a salvage value of $20,200 at the end of its ten-year life. Flint Pix uses straight-line depreciation.
(a)Calculate the new machine’s net present value assuming a 14% discount rate.
(b)Use Excel or a similar spreadsheet application to calculate the new machine’s internal rate of return.
(C)Calculate the new machine’s payback period. (Round answer to 2 decimal places, e.g. 1.25.)payback period ___?____ years
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