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QUESTION FIVE - INVESTMENT ANALYSIS (35 Marks) [60 MINUTES) Addison Ltd faces the choice of replacing some of its equipment immediately or continuing with the
QUESTION FIVE - INVESTMENT ANALYSIS (35 Marks) [60 MINUTES) Addison Ltd faces the choice of replacing some of its equipment immediately or continuing with the old equipment for a further three years. The old equipment needs constant maintenance, often breaks down and presents an environmental problem. It is expected that the new equipment will be superceded in three years by new technology and will have to be replaced. Its market value at that point is estimated to be $60,000. The estimates for the two alternatives are as follows: Initial cost Maintenance costs Additional cash flows (Years 1-3) Cost of training for handling of new equipment on installation Retain Old Equipment Replace Now $480,000 $100,000 per annum Nil $90,000 per annum due to increase in capacity $15,000 . For new capital projects the required rate of return is set at 15%. The old equipment has a current trade-in value of $3,000. Ignore taxes. REQUIRED: a) Find the net present value for each of the two alternatives. b) Find the internal rate of return for each of the two alternatives. c) Which option will you recommend to be accepted by Addison and why
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