Question

CALCULATING AND COMPARING NPV AND EAC: Renegade Industries is considering the purchase of a new machine for the

production of latex. Machine A costs $2.96 million and will last for six years. Variable costs are 30 % of sales, and fixed costs are $1950000 per year. Machine B costs $5.01 million and will last for nine years. Variable costs for this machine are 25 % of sales and fixed costs are $1250000 per year. The sales for each machine will be $9.7 million per year. The required return is 9 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the NPV for each machine. (Round answer to 2 decimal places, round intermediate calculations to 5 decimal places)

Calculate the EAC for each machine. (Round answer to 2 decimal places, round intermediate calculations to 5 decimal places)

NPV for Machine A

NPV for Machine B

EAC for Machine A

EAC for Machine B

4.

INCREMENTAL CASH FLOWS: Your firm is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $5 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $5.2 million. The company wants to build its new manufacturing plant on this land; the plant will cost $11.4 million to build, and the site requires $740000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

Initial Investment

5.

INCREMENTAL CASH FLOWS: Winnebagel Corp. currently sells 30000 motor homes per year at $70000 each and 10000 luxury motor coaches per year at $102000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 30000 of these campers per year at $14000 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,400 units per year and reduce the sales of its motor coaches by 1,100 units per year. What is the amount to use as the annual sales figure when evaluating this project?

Annual Sales Figure

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