2 of3 1 complete Clickthe icon to view Present Click the ico

2 of3 (1 complete) (Clickthe icon to view Present (Click the icon to view Present (Cick the icon to view Future Va Click the icon to view Future Va Read the hese two options Requirements Compute the payback, the ARR, the NPV and the profitability index of these two options Which option should Gammon choose? Why? 1. 2. Print Done clear All 2.

Solution

Answer 1. Payback period - Refubrished Current Machine Year Intial Invetments Cash Inflow Accumulated Net Cash Inflow 0    2,000,000.00                        -                                     -   1      880,000.00                 880,000.00 2      660,000.00             1,540,000.00 3      480,000.00             2,020,000.00 4      300,000.00             2,320,000.00 5      120,000.00             2,440,000.00 6      120,000.00             2,560,000.00 7      120,000.00             2,680,000.00 8      120,000.00             2,800,000.00 Payback period = 2 Years + (460,000 / 480,000 x 1 Year) Payback period = 2 Years + 0.96 Payback period = 2.96 Years (Approx.) Payback period - Purchase New Machine Year Intial Invetments Cash Inflow Accumulated Net Cash Inflow 0    4,000,000.00                        -                                     -   1 2,940,000.00             2,940,000.00 2      760,000.00             3,700,000.00 3      580,000.00             4,280,000.00 4      400,000.00             4,680,000.00 5      220,000.00             4,900,000.00 6      220,000.00             5,120,000.00 7      220,000.00             5,340,000.00 8      220,000.00             5,560,000.00 9      220,000.00             5,780,000.00 10      220,000.00             6,000,000.00 Payback period = 2 Years + (300,000 / 580,000 x 1 Year) Payback period = 1 Years + 0.52 Payback period = 2.52 Years (Approx.) Answer b. Year 0 1 2 3 4 5 6 7 8 9 10 Refubrish Current Machine Cash Inflow        (2,000,000)       880,000               660,000               480,000          300,000          120,000          120,000          120,000          120,000                     -                       -   PV Factor - 16%                  1.000            0.862                    0.743                    0.641              0.552              0.476              0.410              0.354              0.305              0.263              0.227 Present Value        (2,000,000)       758,560               490,380               307,680          165,600            57,120            49,200            42,480            36,600                     -                       -   NPV              (92,380) Purchased New Machine Cash Inflow        (4,000,000)    2,940,000               760,000               580,000    400,000.00    220,000.00    220,000.00    220,000.00    220,000.00    220,000.00    220,000.00 PV Factor - 16%                  1.000            0.862                    0.743                    0.641              0.552              0.476              0.410              0.354              0.305              0.263              0.227 Present Value        (4,000,000)    2,534,280               564,680               371,780          220,800          104,720            90,200            77,880            67,100            57,860            49,940 NPV              139,240 APR - Refubrished Current Machine Accounting Rate Of return = Average Net Income / Intial Investment Year Cash Inflow Depreciation Net Income 1        880,000.00      250,000.00                 630,000.00 2        660,000.00      250,000.00                 410,000.00 3        480,000.00      250,000.00                 230,000.00 4        300,000.00      250,000.00                   50,000.00 5        120,000.00      250,000.00               (130,000.00) 6        120,000.00      250,000.00               (130,000.00) 7        120,000.00      250,000.00               (130,000.00) 8        120,000.00      250,000.00               (130,000.00) Total                 800,000.00 Average Net Income = $800,000 / 8 Years = $100,000 Accounting Rate Of return = $100,000 / $2,000,000 Accounting Rate Of return = 5% APR - Purchase New Machine Year Cash Inflow Depreciation Net Income 1    2,940,000.00      400,000.00             2,540,000.00 2        760,000.00      400,000.00                 360,000.00 3        580,000.00      400,000.00                 180,000.00 4        400,000.00      400,000.00                                   -   5        220,000.00      400,000.00               (180,000.00) 6        220,000.00      400,000.00               (180,000.00) 7        220,000.00      400,000.00               (180,000.00) 8        220,000.00      400,000.00               (180,000.00) 9        220,000.00      400,000.00               (180,000.00) 10        220,000.00      400,000.00               (180,000.00) Total             2,000,000.00 Average Net Income = $2,000,000 / 10 Years = $200,000 Accounting Rate Of return = $200,000 / $4,000,000 Accounting Rate Of return = 5% Answer 2. The Company should purchase a new Machine, since NPV is Positive.