11. Matthew Young is evaluating two new business opportunities. Each of the opportunities shown below has a 15-year life. Matthewuses a 12% discount rate.

		Option 1		Option 2
Equipment purchase and installation		$70,200		$82,000
Annual cash flow		$27,300		$29,700
Equipment overhaul in year 6		$4,700		-
Equipment overhaul in year 8		-		$6,050

Click here to view the factor table.

(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	Option 2
Net present value	$enter a dollar amount rounded to 0 decimal places	$enter a dollar amount rounded to 0 decimal places

(b)

Calculate the profitability index of the two opportunities. (Round answers to 2 decimal places, e.g. 15.25.)

	Option 1	Option 2
Profitability Index	enter profitability index rounded to 2 decimal places	enter profitability index rounded to 2 decimal places

(c)

Which option should Matthew choose?

Matthew should choose select an option Option 1Option 2.

12.

Culver 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 Culver Pix to increase production and sales to 12,000 frames per year. The machine, which has a ten-year life, sells for $137,000 and would cost $10,000 per year to operate. Culver Pixs current machine costs only $8,000 per year to operate. If Culver 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 $20,100 at the end of its ten-year life. Culver Pix uses straight-line depreciation. Click here to view the factor table.

(a)

Calculate the new machines net present value assuming a 14% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)

Net present value

$enter the net present value in dollars rounded to 0 decimal places

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(b)

Use Excel or a similar spreadsheet application to calculate the new machines internal rate of return. (Round answer to 2 decimal places, e.g. 1.25%.)

Internal rate of return

enter the internal rate of return in percentages rounded to 1 decimal place %

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(c)

Calculate the new machines payback period. (Round answer to 2 decimal places, e.g. 1.25.)

Payback period

enter the payback period in years rounded to 2 decimal places years