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Byer, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $47,000 and would have a
Byer, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $47,000 and would have a residual value of $5000 at the end of its 6-year life. The annual operating expenses of the new extruder would be $4000. The other option that Byer has is to rebuild its existing extruder. The rebuilding would require an investment of $40,000 and would extend the life of the existing extruder by 6 years. The existing extruder has annual operating costs of $11,000 per year and does not have a residual value. Byer's discount rate is 12%. Using net present value analysis, which option is the better option and by how much? 14% Present Value of $1 Periods 6 8 10 12 12% 0.507 0.404 0.322 0.257 16% 0.410 0.305 0.227 0.168 0.456 0.351 0.270 0.208 I Present Value of Annuity of $1 Periods 12% 6 4.111 8 4.968 10 5.650 12 6.194 14% 3.889 4.639 5.216 5.660 16% 3.685 4.344 4.833 5.197 A) Better by $21,777 to rebuild existing extruder B) Better by $21,777 to purchase new extruder C) Better by $24,312 to rebuild existing extruder D) Better by $24,312 to purchase new extruder
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