Answered step by step
Verified Expert Solution
Question
1 Approved Answer
I need the answer to question 8.23 and only that one . i have attached all necessary photos . 8.3 The XYZ Company is contemplating
I need the answer to question 8.23 and only that one . i have attached all necessary photos .
8.3 The XYZ Company is contemplating the purchase of a new milling machine. The purchase price of the new machine is $60 000 and its annual operating cost is $2 675.40. The machine has a life of seven years, and it is expected to generate $15 000 in revenues in each year of its life, What is the net present value of the investment in this machine if the interest rate is (a) 8% per year, (b) 10% per year, (c) 12% per year, compounded annually? Interpret your results In years 1 through 7, the net annual cash flow is $15 000-$2675.40 $12324.60 NPV -$60 O00 + $12 324.60 (P/A, 8%,7) =-$60 000+$12 324.60(0.19207)= $4167.23 (a) NPV -$60000+$12 324.60(P/A, 10%, 7) =-$60 000+$12 324.60(0.20541)= $0 (b) NPV-$60 000+ $12 324.60 (P/A, 12%, 7) -- $60 000 + $12 234.60(0.21912)'=-$3754.11 (c) When the interest rate is less than 10%, the present worth of the annual cash flows of $12 324.60 for 7 years is greater than the $60 000 investment; hence, the NPV is a positive number. When the interest rate is 10%, the present worth of the annual cash flows is just equal to the $60000 investment, and NPV 0. When the interest rate is greater than 10%, the present worth of the annual cash flows is less than the investment, and the NPV is negative. Thus, when the interest rate is above 10%, it would not be economical to purchase the milling machine. 8.13 A new plant to produce tractor gears requires an initial investment of $10 million. It is expected that a supplemental investment of $4 million will be needed every 3 years to update the plant. The plant is expected to start producing gears 2 years after the initial investment is made (at the start of the third year). Revenues of $5 million per year are expected to begin to flow at the start of the fourth year Annual operating and maintenance costs are expected to be $2 million per year. The plant has a 15-year life. List the annual cash flows Ans. CFo-$10 000 000, CF1 = CF2= 0, CF, = -$6000 000, CF= CFs= CF,= CFs= CF10 = CF1= CF13 CF14 $3 000 000, CF6= CF, = CF12= CF15 = -$1000 000 8.14 What is the NPV of the plant in Problem 8.13 f the interest rate is 10% per year, compounded annually? Ans. -$5336645.33 8.15 Is the plant described in Problems 8.13 and 8.14 an economically acceptable investment? Ans. No, because the NPV is negative. 8.16 different plant from the one described in Problem 8.13 can be built for an initial investment of $13 million and no supplemental investments. All other data are the same as in Problems 8.13 and 8.14. (a) Compute the net present value. (b) Is this plant an economically acceptable investment? Ans. (a) +$855 708.47; (b) yes 8.17 Is the investment described in Problem 8.16 still economically acceptable if the interest rate is 15% per year, compounded annually? Use the net present value method Ans. No: NPV = -$3624 238.52Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started