Answer and Explanation:
According to the scenario, computation of the given data are as follow:-
a) Net Present Value of Alternative 1
Given that
Net Initial cash investment = $150,000
Rate of return on investment = 10%
Salvage value of old machine = $15,000
Subsequent Cash Inflow is
= Expected Revenue Generated - Operating Cost After Overhaul
= $95,000 - $42,000
= $53,000
Year Subsequent Cash Inflow($) Present Value Table (10%) Present Value Of Cash Inflow($)
1 $53,000 0.909 $48,177
2 $53,000 0.826 $43,778
3 $53,000 0.751 $39,803
4 $53,000 0.683 $36,199
5 $68,000
(53,000+15,000) 0.621 $42,228
Total $210,185
Now
Net Present Value is
= Present Value of Cash Inflow - Present Value of Cash Outflow
= $210,185 - $150,000
= $60,185
b).Net Present Value of Alternative 2
Net initial cash investment = 300,000
Rate of return on investment = 10%
Cash Outflow is
= Expected Revenue Generated - Operating Cost
= $100,000 - $32,000
= $68,000
Year Cash Outflow($) Present Value Table (10%) Present Value ($)
1 $68,000 0.909 $61,812
2 $68,000 0.826 $56,168
3 $68,000 0.751 $51,068
4 $68,000 0.683 $46,444
5 $88,000 0.621 $54,648
($68,000 + $20,000)
Add: Salvage value of old machine now $29,000
Total value $299,140
Now
Net Present Value is
= Present Value of Cash Inflow - Present Value of Cash Outflow
= $299,140 - $300,000
= -$860
c).According to the analysis, we recommended alternative 1 for selecting by management as it contains positive net present value
