Mauser Company is trying to reduce its cost structure in an

Mauser Company is trying to reduce its cost structure in an effort to boost profits. It is looking at automating parts of its production process. It is evaluating two different pieces of equipment to accomplish the cost reductions.

Equip A Cash Flows

Today Year 1 Year 2 Year 3 Year 4   

Cost of equipment (100,000)

Shipping & handling (5,000)

Start - up expenses (15,000)

Total Investment (120,000)

Labor savings (after tax) 15,000 40,000 50,000 50,000

Salvage value (after tax) 5,000

Total Savings 15,000 40,000 50,000 55,000

WACC 9%

NPV =

IRR=

Payback =

Equip B Cash Flows

  Today Year 1 Year 2 Year 3 Year 4

Cost of equipment (120,000)

Shipping & handling (5,000)

Start - up expenses (5,000)

Total Investment (130,000)

Labor savings (after tax) 30,000 40,000 50,000 50,000

Salvage value (after tax) 5,000

Total Savings 30,000 40,000 50,000 55,000

WACC 9%

NPV =

IRR=

Payback =

Should you invest in this project? Why?

Answer bolded questions and please show work

Solution

Equipment-A NPV Year Cash flows PVF @ 9% Present Value 0 -120000 1 -120000 1 15000 0.917431 13761.47 2 40000 0.84168 33667.2 3 50000 0.772183 38609.17 4 55000 0.708425 38963.39 Present worth 5001 Equipment -B Year Cash flows PVF @ 9% Present Value 0 -130000 1 -130000 1 30000 0.917431 27522.94 2 40000 0.84168 33667.2 3 50000 0.772183 38609.17 4 55000 0.708425 38963.39 Present worth 8763 IRR Equipment-A: Year Cash flows PVF @10.60% Present Value 0 -120000 1 -120000 1 15000 0.904159 13562.39 2 40000 0.817504 32700.15 3 50000 0.739153 36957.67 4 55000 0.668312 36757.18 Present worth -22 IRR = 10.60% Equipment-B Year Cash flows PVF @ 11.75% Present Value 0 -130000 1 -130000 1 30000 0.894855 26845.64 2 40000 0.800765 32030.59 3 50000 0.716568 35828.4 4 55000 0.641224 35267.33 Present worth -28 IRR = 11.75% Payback period Equipment-A: Year Cash flows Cumulative CF 0 -120000 -120000 1 15000 -105000 2 40000 -65000 3 50000 -15000 4 55000 40000 Payback = 3 years + 15000 /55000 = 3.27 years Equipment-B Year Cash flows Cumulative CF 0 -130000 -120000 1 30000 -90000 2 40000 -50000 3 50000 0 4 55000 55000 Pyabck period = 3 years Equipment-B shall be selected.