Chapter 7 Question 22: Evaluating alternative capital asset decisions

Student Name: Course Name: Student ID: Course Number: SOLUTION

Select the red highlighted items below for tips and suggestions to complete this problem. The net cash flows for each copier have been calculated for you and are shown below. Select each cell to see the formula used for this calculation. Parts A through D below have been structured to help you develop the solution. Assumptions Current Copier Net Cash Flows: Years 1 2 3 4 5 6 Net * Cash Flow -675 -675 -4,575 -4,889 -5,200 -5,200

* After taxes Cost of capital Income tax rate 7% 35%

New Copier Projected Net Cash Flows Net * Years Cash Flow 0 -25,000 1 600 2 1,493 3 880 4 443 5 131 6 131 7 131 8 -261

A. What is the present value of each copier? Present value of current copier Equivalent annual cost Present value of new copier ($15,856.63) ($3,326.66) (21,967.11)

B. If you replace the current copier now, when the book value is $6,248 and the resale value is $8,000, what will be the present value of the decision? Present value Equivalent annual cost (14,580.31) (2,441.73)

C. If you replace the copier in 2 years, when the book value is $2,678 and what will be the present value of the decision? the resale value is $3,500, what will be the present value of the decision? Present value Equivalent annual cost (17,602.02) ($2,506)

D. If you replace the copier in 6 years, what will be the present value of the decision? Assume a zero book and resale value. Present value Equivalent annual cost (30,494.25) ($3,487) Immediately

When should the copier be replaced? Help with Excel's PV function

Copyright 2008 McGraw-Hill/Irwin

Chapter 7 Question 24
Student Name: Course Name: Student ID: Course Number: SOLUTION

Select the red highlighted items below for tips and suggestions to complete this problem.

Cash flows A PV Cash flows A Cash flows B PV Cash flows B Annuity Factor - 3 years Annuity Factor - 4 years Equivalent Annual Cost A Equivalent Annual Cost B

0 40000 40000.0 50000 50000.0

1 10000 9434.0 8000 7547.2

2 10000 8900.0 8000 7120.0

2.67

3 10000 8396.2 8000 6717.0

8000 6336.7

Click here for help with Excel's PV function 3.47

24,964.39 22,429.57 B

b. Which machine should Borstal buy?

c. How much would you actually have to charge in each future year if there is steady 8% per year inflation? 26,961.54

Copyright 2008 McGraw-Hill/Irwin