Adele Corp. is considering the replacement of some electric generating equipment by a more efficient, technologically advanced model. The new equipment costs $110,000 but the vendor has agreed to provide a trade-in allowance on the existing equipment of $35,000. The present equipment has a remaining useful life of 4 years and the new equipment would also be retired at the end of its 4th year of service. Given the expected level of future operations, the existing equipment's operating costs are projected at $40,000 per year. The new equipment is expected to result in saving of operating costs of $20,000 per year. The current equipment would have a $40,000 salvage value at the end of its useful life, while the proposed equipment's salvage value is estimated to be $20,000. The desired rate of return on investments is 10%.
What is the NPV of retaining the existing equipment?
What is the NPV of replacing the existing equipment?
Which alternative should the Company choose, and why
The solution goes into a fair amount of detail pertaining to the question being asked. The explanation is very good and yet concise and to the point. It is also very easy to follow along. Overall, a very good answer to the question being asked.
Finance: Capital budgeting NPV
Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $1.8 million. The marketing department predicts that sales related to the project will be $1.1 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. Howell also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the project's life. The corporate tax rate is 35 percent. The required rate of return for Howell is 16 percent. Should Howell proceed with the project?View Full Posting Details