This paper circulates around the core theme of Compute the net present value of the new machine using the tables in Exhibits 26–3 and 26–4. together with its essential aspects. It has been reviewed and purchased by the majority of students thus, this paper is rated 4.8 out of 5 points by the students. In addition to this, the price of this paper commences from £ 99. To get this paper written from the scratch, order this assignment now. 100% confidential, 100% plagiarism-free.
Exercise 26.10: Replacing Existing Equipment
Exhibit 26-3 Present Value of $1 Payable in n Periods
|
Number Present Value of $1 Due in n Periods *
of Periods ( n ) Discount Rate
|
|
1% 1½% 5% 6% 8% 10% 12% 15% 20%
|
|
1 .990 .985 .952 .943 .926 .909 .893 .870 .833
|
|
2 .980 .971 .907 .890 .857 .826 .797 .756 .694
|
|
3 .971 .956 .864 .840 .794 .751 .712 .658 .579
|
|
4 .961 .942 .823 .792 .735 .683 .636 .572 .482
|
|
5 .951 .928 .784 .747 .681 .621 .567 .497 .402
|
|
6 .942 .915 .746 .705 .630 .564 .507 .432 .335
|
|
7 .933 .901 .711 .665 .583 .513 .452 .376 .279
|
|
8 .923 .888 .677 .627 .540 .467 .404 .327 .233
|
|
9 .914 .875 .645 .592 .500 .424 .361 .284 .194
|
|
10 .905 .862 .614 .558 .463 .386 .322 .247 .162
|
|
20 .820 .742 .377 .312 .215 .149 .104 .061 .026
|
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24 .788 .700 .310 .247 .158 .102 .066 .035 .013
|
|
36 .699 .585 .173 .123 .063 .032 .017 .007 .001
|
*The present value of $1 is computed by the formula p 5 1 / (1 + 1 i )
n , where p is the present value of $1, i is the discount rate, and n
is the number of periods until the future cash flow will occur. Amounts
in this table have been rounded to three decimal places and are shown
for a limited number of periods and discount rates. Many calculators are
programmed to use this formula and can compute present values when the
future amount is enter
ed along with values for i and n.
EXHIBIT 26–4 Present Value of a $1 Annuity Receivable Each Period for n Periods
|
Number Present Value of $1 to Be Received Periodically for n Periods
of Periods (n) Discount Rate
|
|
1% 1½% 5% 6% 8% 10% 12% 15% 20%
|
|
1 0.990 0.985 0.952 0.943 0.926 0.909 0.893 0.870 0.833
|
|
2 1.970 1.956 1.859 1.833 1.783 1.736 1.690 1.626 1.528
|
|
3 2.941 2.912 2.723 2.673 2.577 2.487 2.402 2.283 2.106
|
|
4 3.902 3.854 3.546 3.465 3.312 3.170 3.037 2.855 2.589
|
|
5 4.853 4.783 4.329 4.212 3.993 3.791 3.605 3.352 2.991
|
|
6 5.795 5.697 5.076 4.917 4.623 4.355 4.111 3.784 3.326
|
|
7 6.728 6.598 5.786 5.582 5.206 4.868 4.564 4.160 3.605
|
|
8 7.652 7.486 6.463 6.210 5.747 5.335 4.968 4.487 3.837
|
|
9 8.566 8.361 7.108 6.802 6.247 5.759 5.328 4.772 4.031
|
|
10 9.471 9.222 7.722 7.360 6.710 6.145 5.650 5.019 4.192
|
|
20 18.046 17.169 12.462 11.470 9.818 8.514 7.469 6.259 4.870
|
|
24 21.243 20.030 13.799 12.550 10.529 8.985 7.784 6.434 4.937
|
|
36 30.108 27.661 16.547 14.621 11.717 9.677 8.192 6.623 4.993
|
EnterTech has noticed a significant decrease in the profitability of
its line of portable CD players. The production manager believes that
the source of the trouble is old, inefficient equipment used to
manufacture the product. The issue raised, therefore, is whether
EnterTech should (1) buy new equipment at a cost of $120,000 or (2)
continue using its present equipment. It is unlikely that demand for
these portable CD players will extend beyond a five-year time horizon.
EnterTech estimates that both the new equipment and the present
equipment will have a remaining useful life of five years and no salvage
value. The new equipment is expected to produce annual cash savings in
manufacturing costs of $34,000, before taking into consideration
depreciation and taxes. However, management does not believe that the
use of new equipment will have any effect on sales volume. Thus, its
decision rests on the magnitude of the potential cost savings. The old
equipment has a book value of $100,000. However, it can be sold for only
$20,000 if it is replaced. EnterTech has an average tax rate of 40
percent and uses straight-line depreciation for tax purposes. The
company requires a minimum return of 12 percent on all investments in
plant assets.
a. Compute the net present value of the new machine using the tables in Exhibits 26–3 and 26–4.
b. What nonfinancial factors should EnterTech consider?
c. If the manager of EnterTech is uncertain about the accuracy of the
cost savings estimate, what actions could be taken to double-check the
estimate?
