1. Suppose you are planning to buy a new machine to produce a dish washing liquid...

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1. Suppose you are planning to buy a new machine to produce a dish washing liquid soap with the name Bright. The machine will cost you $250,000 and could last for four years and the salvage value will be zero. Year 1 Demand (units) 35,000 2 40,000 3 50,000 4 25,000 The selling price of product Bright is expected to be $12 per unit and the variable cost of production is expected to be $8 per unit. Incremental annual fixed production overheads of $25,000 per year will be incurred. Selling price and costs are expected to increase annually as follows: Selling price of Bright by 3%, the variable cost of production by 4%, and fixed production overheads by 6%. Consider a 10% discount rate for this activity. (a) Calculate the Net Present Value of buying the new machine and comment on your findings. (b) Calculate the Accounting Rate of Return and comment on the findings. 2. Zambezi Quarries is considering acquiring a new drilling machine that is expected to be more efficient than the current machine. The project is to be evaluated over four years. The initial capital outlay required to get the new operating machine is $675,000. Incremental cash flows associated with the machine are uncertain, so management developed a worst, most likely and best outcomes with the following probabilistic forecast of cash flows by year. The cost of capital is 10%. Year 1 Probability Year 2 Probability Year 3 Probability Year 4 Probability $150 .30 $200 .35 $350 .30 $300 .25 175 .40 210 .45 370 .25 360 .35 300 .30 250 .20 400 .45 375 .40 Calculate only the project's best and worst NPV's 1. Suppose you are planning to buy a new machine to produce a dish washing liquid soap with the name Bright. The machine will cost you $250,000 and could last for four years and the salvage value will be zero. Year 1 Demand (units) 35,000 2 40,000 3 50,000 4 25,000 The selling price of product Bright is expected to be $12 per unit and the variable cost of production is expected to be $8 per unit. Incremental annual fixed production overheads of $25,000 per year will be incurred. Selling price and costs are expected to increase annually as follows: Selling price of Bright by 3%, the variable cost of production by 4%, and fixed production overheads by 6%. Consider a 10% discount rate for this activity. (a) Calculate the Net Present Value of buying the new machine and comment on your findings. (b) Calculate the Accounting Rate of Return and comment on the findings. 2. Zambezi Quarries is considering acquiring a new drilling machine that is expected to be more efficient than the current machine. The project is to be evaluated over four years. The initial capital outlay required to get the new operating machine is $675,000. Incremental cash flows associated with the machine are uncertain, so management developed a worst, most likely and best outcomes with the following probabilistic forecast of cash flows by year. The cost of capital is 10%. Year 1 Probability Year 2 Probability Year 3 Probability Year 4 Probability $150 .30 $200 .35 $350 .30 $300 .25 175 .40 210 .45 370 .25 360 .35 300 .30 250 .20 400 .45 375 .40 Calculate only the project's best and worst NPV's