Question

For 11, i chosed 3, is it correct?

Spt X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $60,000 per year; operating costs with the new machine are expected to be $48,000 per year. The new machine will cost $65,000 and will last for six years, at which time it can be sold for $1,000. Thbe current machine will also last for six more years but will not be worth anything at that time. It cost $32,000 three yearS ago but is currently worth only $6,000 Assuming a discount rate of 7% , what is the incremental net present value of repiacing the current machine with the new machine? 9. AO S-779 FO S-4.995 BO S-1,130 EO $-3,445 DO S-2,376 S-1,638 8 pt X Company is planning to launch a new product. A market research study, costing $170,000, was conducted last e, indicating that the product will be successful for the next four years. Profits from sales of the product are expected. to be $159,000 in each of the first two years and $112,000 in each of the last two years. The company plans to undertake mmdiate advertising campaign that will cost $89,000. New manufacturing equipment will have to be purchased for $370,000; it will have zero disposal value at the end of the four years. Assuming a discount rate of 6%, what is the net present value of launching the new product? 10. AO $15,231 FO $63,385 EO $17,658 BO $20.257 DO $35,833 CO $26,942 pt X Company must replace one of its current machines with either Machine A or Machine B. The useful life of both machines is seven years. Machine A costs $50,000, and Machine B costs $58,000. Estimated annual cash fiows with the two machines are as follows: Machine B Machine A Year S-7,000 -4,000 3,000 -3,000 $-6,000 -8,000 -8,000 -8,000 -6,000 -5,000 1 2 3 4 -3,000 -2,000 -2,000 5 6 -4,000 7 If X Company buys Machine B instead of Machine A, what is the payback period (in years)? 11. AO 2 во з FO 7 CO 4 DO 5 EO 6

Answer 1

Net Present value = Present value of cash inflows – Present value of cash outflows

= (-65000+6000)+ (60,000-48000)*PVAF(7%, 6 years) + 1,000*PVF(7%, 6 years)

= - 59000 + 12000*4.767 +1000*0.666

= -$1,130

i.e. B

NPV = 159000*PVF(6%, 1 year) + 159000*PVF(6%, 2 years) + 112,000*PVF(6%, 3 years) + 112,000*PVF(6%, 4 years) – 89000 – 370000

= 159000*0.943 + 159000*0.890 + 112000*0.840 + 112000*0.792 – 89000 – 370000

= $15,791

i.e. A approx.

Extra cost of Machine B = 58,000-50,000 = $8000
Year	Incremental Cash flows	Cumulative Cash flows
0	-8000	-8000
1	-1000	-9000
2	4000	-5000
3	5000	0
4	5000	5000
5	3000	8000
6	3000	11000
7	2000	13000
Hence, payback period = 3 years
i.e. B
Payback period is the numbers of years taken to recover extra cost