Question

ise investment Wallis Ruddy, the ess has continued to re more business estment projects and OBLEMS-SERIES B LO 10-2 Problem 10-16B Using present value techniques to evaluate alternative invest opportunities Ruddy Automobile Repair, Inc., currently has three repair shops in Boston. Wallis Rue president and chief executive officer, is facing a pleasant dilemma: the business has contin grow rapidly and major shareholders are arguing about different ways to capture more bi opportunities. The company requires a 12 percent rate of return for its investr uses the straight-line method of depreciation for all fixed assets. One group of shareholders wants to open another shop in a newly developed suburban munity. This project would require an initial investment of S480,000 to acquire all the ne equipment, which has a useful life of five years with a salvage value of $160,000. Once the begins to operate, another $120,000 of working capital would be required; it would be reco at the end of the fifth year. The expected net cash inflow from the new shop follows. Year 4 Year 1 $60,000 Year 2 $100,000 Year 3 $152,000 Year 5 $240,000 $192,000 A second group of shareholders prefers to invest $400,000 to acquire new computerized di- agnostic equipment for the existing shops. The equipment is expected to have a useful life of five years with a salvage value of $80,000. Using this state-of-the-art equipment, mechanics would be able to pinpoint automobile problems more quickly and accurately. Consequently, it would allow the existing shops to increase their service capacity and revenue by $125,000 per year. The com- pany would need to train mechanics to use the equipment, which would cost $45,000 at the beginning of the first year. Required Round your computations to two decimal points. a. Determine the net present value of the two investment alternatives. b. Calculate the present value index for each alternative. c. Indicate which investment alternative you would recommend. Explain your choice. 10-2 Problem 10-17B Applying the net present value approach with and without tan considerations Ben Baxi, the president of Ben's Moving Services, Inc., is planning to spend 5640,01 trucks. He expects the trucks to increase the company's cash inflow as follows to spend $640,000 for new

Answer 1

C E 5 6 equipment NEW SHOP 7 initial investment 480000 400000 8 salvage value 160000 80000 working capital 120000 0 10 11 Years training cost 5th year inflow 0 45000 12 520000 205000 13 14 New shop Year 15 1 60000 125000 16 2 100000 125000 17 152000 125000 18 4 192000 125000 19 520000 205000 5 20 21 $58,562.85 $50,991.17 NPV 22 PV index 1.09760475 1.1145869 23 24 LL LU

Formulas used

5th year inflow-:

NEW SHOP :- 240000(inflow)+160000(salvage value)+120000(Workin capital)= 520000

Equipment:- 125000(inflow)+80000(salvage value) = 205000

NPV:-

New SHOP :-=NPV(0.12,C16:C20)-C8-C10

Equipment:- =NPV(0.12,D16:D20)-D8-D12

PV Index :-

NEW SHOP :- =NPV(0.12,C16:C20)/(C8+C10)

EQUIPMENT:- =NPV(0.12,D16:D20)/(D8+D12)

Answer

answer of a and b can directly find from the photo

(C)

i will choose second option because it is having more PV Index and PV Index is better measure because it is considers amount of initial investment.

Due to time constraints and to maintain quality and depth of an answer I am only able to answer first question

I hope my efforts will be fruitful to you....?

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