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I need to learn the excel formulas (please use excel) and please also add the answers. Capital Budgeting Analysis While preparing its budget for the
I need to learn the excel formulas (please use excel) and please also add the answers.
Capital Budgeting Analysis While preparing its budget for the second quarter, as part of its expansion plan, the Sweetwater Candy Company is planning for a capital expenditure on new equipment in April. To determine how much that expenditure will be, you must evaluate the following two options. The company has an old piece of machinery that it uses to dip chocolates. The machinery is worn out and must either be overhauled or replaced with a new machine. If the company keeps and overhauls its old machine, then it will be used for five more years and then discarded (no salvage value). If new machinery is purchased, the old machine will be traded in. The new machine will be used for 10 years, after which it will be traded in for another new machine. The new machine would be more efficient resulting in an increase in expected annual cash flows, as shown below. Management requires investments on machinery to have a payback period of 5 years, and it requires a 14% return on its investments. The company has assembled the following information: Option #1: Keep old equipment and overhaul it. If the company keeps and overhauls its old equipment, it will be used for five more years and then discarded (no salvage value). Option #2: Buy new equipment and sell the old equipment. If new equipment is purchased now, it will be used for 10 years, after which it will be traded in at its salvage value for another new piece of equipment. The new equipment would cost less to operate resulting in an increase in expected annual cash flows, as shown below. The old equipment would be sold now at its salvage value. The company has assembled the following information: Purchase cost now Cost of overhaul needed now Annual expected cash flows generated Salvage value now Salvage value in ten years Old Equipment N/A $18,000 $5,500 $3,000 N/A New Equipment $50,000 N/A $8,500 N/A $6,000 Required: (A.) Calculate the Payback Period, Net Present Value, and Internal Rate of Return for the two options. (B.) Which investment should the company choose? ExplainStep by Step Solution
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