Sandy of Sandys Submarine Sandwiches was considering two different types of sandwich toasters. The first option costs
Question:
Sandy of Sandy’s Submarine Sandwiches was considering two different types of sandwich toasters. The first option costs $80,000, had a ten-year life and a $1,000 salvage value. The second option costs only $60,000, but had only an eight-year life (and still $1,000 salvage value). His business’s weighted average cost of capital is 25%. Sandy has figured his cash flows and profits for the life of both toasters and it is shown in the following table:
Option A | Option B | ||||||
Years | Cash Flow | Profits | Cash Flow | Profits | |||
0 | -80,000 | -60,000 | |||||
1 | 10,000 | 3,000 | 5,000 | 2,000 | |||
2 | 20,000 | 6,000 | 10,000 | 3,000 | |||
3 | 20,000 | 6,000 | 20,000 | 4,500 | |||
4 | 20,000 | 6,000 | 30,000 | 7,500 | |||
5 | 25,000 | 10,000 | 40,000 | 9,500 | |||
6 | 25,000 | 10,000 | 50,000 | 11,000 | |||
7 | 30,000 | 15,000 | 50,000 | 11,000 | |||
8 | 30,000 | 15,000 | 50,000 | 11,000 | |||
9 | 35,000 | 17,500 | 0 | 0 | |||
10 | 40,000 | 20,000 | 0 | 0 | |||
Total | 108500 | 59500 | |||||
What are the payback periods and return on investment for each of these options? Which toaster should he buy?
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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