Question
Complete the following 2 problems in an Excel spreadsheet. Problem #1: Chapter 25 Net Present Value Computing net present value of alternative investments Interstate manufacturing
Complete the following 2 problems in an Excel spreadsheet.
Problem #1: Chapter 25 Net Present Value
Computing net present value of alternative investments
Interstate manufacturing is considering either replacing one of its old machines with a new machine or having the old machine in overhauled. Information about the two alternatives are as follows. Management requires 10% rate of return on its investments.
Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five year and then for its salvage value.
cost of old machine112,000
Cost of overhead...150,000
Annual expected revenues generated...95000
Annual cash operating after overhaul..42,000
Salvage value of old machine in 5 years...15,000
Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold.
Cost of new machine...300,000
Salvage value of old machine now...29,000
Annual expected revenues generated...100,000
Annual cash operating costs...32,000
Salvage value of new machine in 5 years.20,000
Required:
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Determine the Net present value of alternative 1
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Determine the Net present value of alternative 2
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Which alternative do you recommend to the management to select? Explain.
Problem #2: Chapter 25 Payback Period & Net Present Value
Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $250,000 and will yield the following expected cash flows. Management requires investments to have a payback period of three years, and it requires a 10% return on investments.
Period | Cash Flow |
1 | $ 47,000 |
2 | 52,000 |
3 | 75,000 |
4 | 94,000 |
5 | 125,000 |
Required:
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Determine the payback period for this investment.
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Determine the net present value for this investment.
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Should management invest in this project? Explain.
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