THIS LOOKS LIKE A LONG PROBLEM BUT IT'S JUST A LOT OF WORDS- THE 2 QUESTIONS ARE JUST CALCULATIONS

Long story short- the guy's CNC machine broke down and he needs to decide what to do. If capacity increased, French estimated that sales revenues would rise by at least $50,000 per month due to unmet demand and increased efficiency. The companys margins on the additional revenues were expected to be 35% .

French saw three viable options to increase capacity: 1. Purchase an additional CNC machine for cash, 2. Finance the purchase of an additional CNC machine, or 3. Add a third shift (a night shift) to better utilize the two CNC machines Peregrine already owned

French considered the details of each option, keeping in mind that for long-term projects he would use a discount rate of 7%.

OPTION 1: PURCHASE A NEW CNC MACHINE WITH CASH

Long term projects he would use a discount rate of 7% Frenchs preliminary research revealed that the cost of the new equipment would be $142,000. He also estimated that there would be increased out-of-pocket operating costs of $10,000 per month if a new machine were brought online. After five years, the machine would have a salvage value of $40,000. Although Peregrine did not have the cash readily available to make the purchase, French believed that with a small amount of cash budgeting and planning, this option would be feasible. ***This option has an Initial payment of 142,000**

OPTION 2: FINANCE THE PURCHASE OF A NEW CNC MACHINE

The operating costs and salvage values would be the same as option 1, the purchasing option. The company had the necessary cash on hand to make the down payment for the lease. With both the leasing and purchasing options, the company had sufficient space to operate the new equipment. The company selling the CNC machine also offered a leasing option. The terms of the lease included a down payment of $50,000 and monthly payments of $2,200 for five years. After five years, the equipment could be purchased for $1. The operating costs and salvage values would be the same as option 1, the purchasing option. ***this option has an Initial payment of 50,000**

OPTION 3: ADD A THIRD SHIFT

his initial plan was for the night shift to run as a skeleton crew with the primary purpose of keeping the CNC machines operational for 24 hours. He believed that adding a third shift would produce the same increase in revenue as adding a new CNC machine to his existing shifts. He estimated that adding a third shift would create $12,000 in additional monthly out-of-pocket operating costs, but no $ on machinery.

THE ONLY QUESTIONS I NEED HELP WITH ARE BELOW:

2. Compute and compare the net present value and payback period of each option. <---- Option 1 and two will have payback periods. Option three will have no payback period. You can find them if the info above is presented on a year by year basis

4. Rounding to the nearest 1%, at what discount rate does leasing produce a higher net present value than paying cash? <--- The answer to this should be around 14%, can you show how this answer is found?