Question
Santana Rey is considering the purchase of equipment for Business Solutions that would allow the company to add a new product to its computer furniture
Santana Rey is considering the purchase of equipment for Business Solutions that would allow the company to add a new product to its computer furniture line. The equipment is expected to cost $393,840 and to have a six-year life and no salvage value. The equipment is expected to generate income of $16,039 and net cash flow of $75,130 in each year of its six-year life. Santana requires an 5% return on all investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) (Negative net present values should be indicated with a minus sign. Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole number.)
1-a. Compute the payback period for this equipment. 1-b. Compute the net present value for this equipment. 1-c. Compute internal rate of return for this equipment. 2. If Santana requires investments to have payback periods of four years or less, should she invest in this equipment? 3. If Santana requires investments to have at least an 5% internal rate of return, should she invest in this equipment?
Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Alternative 1: Keep the old machine and have it overhauled. This requires an initial investment of $148,000 and results in $50,000 of net cash flows in each of the next five years. After five years, it can be sold for a $18,000 salvage value. Alternative 2: Sell the old machine for $35,000 and buy a new one. The new machine requires an initial investment of $295,000 and can be sold for a $10,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $51,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which alternative should management select based on net present value?
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