Question

with the steps of the solution

a. [10 marks] A supermarket chain buys loaves of bread from its supplier at $0.5 per loaf and sells them at $0.75 per loaf. The chain is considering two options to bake its own bread. Capital investment Useful life (Years) Annual fixed costs Machine A $8,000 7 $2,000 Machine B $12,000 7 $3,500 Neither machine has a market value at the end of seven years, and MARR is 10% per year. If the demand for bread at this supermarket is 20,000 loaves per year, what strategy should be adopted for acquiring bread? i. Continue buying from the supplier iii. Install Machine B ii. Install Machine A iv. Install both Machine A and Machine B

Answer 1

NPV is used in capital budgeting techniques to evaluate the financial viability of a project or investment. It is calculated as the difference between the present value of cash inflows and the present value of cash outflows for the expected operational life of the project

Answer and Exblaination: Machine B $120000 SI NEL Details Machine A A Capital Investment $8.000 Project Tenure (*) 7 Annual fixed cost $2.000 Price Perlaaf $0.5 Total annual revenue @20.000 leaks besYear #0,000 F=E-C), Gross Annual Income NPV = (F* PVIEA (Z YC, 10%)-A) c D $3.500 $0.5 $10,000 $6,500 $8.000 PVIEA = -(ltr): r .. where = Be'sentvalue Interest factor of Amrity Y-Interest rale ber þesiod na frelmber of Periods 4.8684 = F* PVIFA - A$acto* 4.8684 - $3000 For Machine A $6500* 4.8684 – $12,000 for machine B NPV, For machine Az $30947,2 pas NPVLA) NAV(B) Nov, For machine B = $ 19644.6 bo Install Machine A Alevliet retentualue)