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Hello , I am working on the following problem. A manufacturing company is evaluating two options for new equipment to introduce a new product to

Hello , I am working on the following problem.

A manufacturing company is evaluating two options for new equipment to introduce a new product to its suite of goods. The details for each option are provided below:

Option 1

  • $75,000 for equipment with useful life of 7 years and no salvage value.
  • Maintenance costs are expected to be $2,500 per year and increase by 3% in Year 6 and remain at that rate.
  • Materials in Year 1 are estimated to be $20,000 but remain constant at $10,000 per year for the remaining years.
  • Labor is estimated to start at $50,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

Year 1

Year 2 50,000

Year 3 113,000

Year 4 125,000

Year 5 125,000

Year 6 150,000

Year 7 150,000

Option 2

  • $50,000 for equipment with useful life of 7 years and a $10,000 salvage value
  • Maintenance costs are expected to be $4,500 per year and increase by 3% in Year 6 and remain at that rate.
  • Materials in Year 1 are estimated to be $25,000 but remain constant at $20,000 per year for the remaining years.
  • Labor is estimated to start at $70,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

Year 1 -

Year 2 75,000

Year 3 100,000

Year 4 125,000

Year 5 155,000

Year 6 200,000

Year 7 150,000

The company's required rate of return and cost of capital is 8%.

Management has turned to its finance and accounting department to perform analyses and make a recommendation on which option to choose. They have requested that the three main capital budgeting calculations be done: NPV, IRR, and Payback Period for each option.

So Far i have worked out (I THINK) the NPV for each option using all the above information.

option 1

PV 8% for years 0-7

(75,000) (67,128) (12,002) 37,670 42,530 36,905 48,778 44,113

NPV= Option 1 Net present value = $55,866

option 2

PV 8% for years 0-7

(50,000) (92,127) (18,518) 982 17,647 35,197 59,374 30,214

NPV = option 2 net present value = (17,231)

I am not sure if these are correct and then how to then go about finding the IRR and payback. I am stuck. can someone lead me in the right direction? thank you.

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