Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Drew owns and operates an onion packing plant. To bag and transfer the bags to pallets, Drew has two options. He can invest in a

Drew owns and operates an onion packing plant. To bag and transfer the bags to pallets, Drew has two options. He can invest in a fully automatic bagging machine and palletizing machine or he can have partially automated baggers and have workers place the bags onto the pallets. The first option is a higher initial investment but has significant labor-cost savings. The second option is a lower investment but has higher labor costs over the long run. After laying out the cash flows, Drew has determined that the fully automatic process has a NPV of $168,839.76 over 10 years. The more labor intensive option has a NPV of $129,010.90 over 7 years. Drew's required rate of return is 10%, the inflation rate is 1%, the risk premium is 1% and the marginal tax rate is 30%.

What is the Real Discount Rate?

a.6.27%

b.5.29%

c.6.63%

d.6.75%

What is the annuity equivalent for the fully automatic bagging machine and palletizing machine?

a.$12,583.60

b.$25,243.07

c.$22,383.79

d.$23,633.53

What is the annuity equivalent for the partially automated baggers with workers placing the bags on pallets?

a.$18,380.24

b.$15,367.78

c.$12,758.23

d.$23,633.53

If Drew makes his decision based on the Annuity Equivalents, which should he choose?

a.fully automatic bagging machine and palletizing machine

b.partially automated baggers with workers placing the bags on pallets

c.Indifferent between the two

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management

Authors: Rajiv Srivastava, Anil Misra

2nd Edition

0198072074, 9780198072072

More Books

Students also viewed these Finance questions

Question

3. Use personal best goals, not between-student competition.

Answered: 1 week ago

Question

L A -r- P[N]

Answered: 1 week ago

Question

List the activities involved in employer-designed HRD programs

Answered: 1 week ago