Washington Brewery has two independent investment opportunities to purchase brewing equipment so the company can meet growing
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Question:
Washington Brewery has two independent investment opportunities to purchase brewing equipment so the company can meet growing customer demand. The first option (equipment A) requires an initial investment of $230,000 for equipment with an expected life of 5 years and a salvage value of $20,000. The second option (equipment B) requires an initial investment of $120,000 for equipment with an expected life of 4 years and a salvage value of $15,000. The company's required rate of return is 10 percent. Additional cash flow information for each investment is provided as follows.
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
---|---|---|---|---|---|
Equipment A | |||||
Utility savings | $12,000 | $14,000 | $15,000 | $16,000 | $17,000 |
Additional revenue | 45,000 | 48,000 | 50,000 | 55,000 | 60,000 |
Maintenance costs | (5,000) | (8,000) | (10,000) | (13,000) | (16,000) |
Equipment B | |||||
Utility savings | $8,000 | $9,000 | $10,000 | $10,000 | - |
Additional revenue | 35,000 | 36,000 | 38,000 | 42,000 | - |
Maintenance costs | (6,000) | (8,000) | (9,000) | (11,000) | - |
Required:
- Calculate the net present value for each investment. Round to the nearest dollar. Which, if any, investment is preferable? Explain.
Related Book For
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey
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