EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 10.A, Problem 3P
Summary Introduction
To determine: The best cooling unit.
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The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 7%, and the projects' expected net costs are listed in the following table:
Expected Net Cost
Year
Conveyor
Forklift
0
-$500,000
-$200,000
1
-120,000
-160,000
2
-120,000
-160,000
3
-120,000
-160,000
4
-120,000
-160,000
5
-20,000
-160,000
What is the IRR of each alternative?
The IRR of alternative 1 is -Select-undefined 5% 7% 9% Item 1 .
The IRR of…
The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher
operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 6%, and the projects' expected net costs are listed in the following table:
a. What is the IRR of each alternative?
The IRR of alternative 1 is -Select-
Alternative 2: $
Which method should be chosen?
The IRR of alternative 2 is -Select-
b. What is the present value of costs of each alternative? Do not round intermediate calculations. Round your answers to the nearest dollar. Use a minus sign to enter negative values, if any.
Alternative 1: $
-Select-
Year
0
1
2
3
4
5
should be chosen.
Expected…
The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably
higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 12%, and the projects' expected net costs are listed in the following table:
a. What is the IRR of each alternative?
The IRR of alternative 1 is -Select-
Year
0
1
2
3
4
5
-Select-
Expected Net Cost
Forklift
-$200,000
-160,000
-160,000
-160,000
-160,000
-160,000
Conveyor
-$500,000
-120,000
-120,000
-120,000
-120,000
-20,000
The IRR of alternative 2 is-Select-
b. What is the present value of costs of each alternative? Do not round Intermediate calculations. Round your answers to the nearest…
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EBK CONTEMPORARY FINANCIAL MANAGEMENT
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- Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 6%. 1 2 3 4 НСС -$600,000 -$45,000 -$45,000 -$45,000 -$45,000 -$45,000 LCC -$90,000 -$175,000 -$175,000 -$175,000 -$175,000 -$175,000 a. Which unit would you recommend? I. Since all of the cash flows are negative, the IRR's will be negative and we do not accept any project that has a negative IRR. II. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. III. Since all of the cash flows are negative, the NPV's will be negative and we do not accept any…arrow_forwardBlossom Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 5%. Option A Option B Initial cost $183,000 $281,000 Annual cash inflows $70,000 $80,000 Annual cash outflows $28,000 $25,000 Cost to rebuild (end of year 4) $48,000 $0 Salvage value $0 $7,000 Estimated useful life 7 years 7 yearsarrow_forwardKim Inc. must install a new air-conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 5.5%. 0 1 2 3 4 5 H HCC LCC -$610,000 -$110,000 -$45,000 -$45,000 -$45,000 -$175,000 -$175,000 -$175,000 -$45,000 -$175,000 -$45,000 -$175,000 a. Which unit would you recommend? 1. Since all of the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV. II. Since all of the cash flows are negative, the IRR's will be negative and we do not accept any project that has a negative IRR. III. Since we are examining costs, the unit chosen would be the one that had the…arrow_forward
- Kim Inc. must install a new air-conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 5%. HCC LCC 0 1 2 3 5 -$590,000 -$110,000 -$45,000 -$170,000 -$45,000 -$45,000 -$170,000 -$170,000 -$45,000 -$170,000 -$45,000 -$170,000 a. Which unit would you recommend? 1. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. II. Since all of the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV. III. Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs.…arrow_forwardKim Inc. must install a new air-conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 7.5%. 0 1 2 3 4 5 HCC -$600,000 -$45,000 -$45,000 -$45,000 -$45,000 -$45,000 LCC -$110,000 -$180,000 -$180,000 -$180,000 -$180,000 -$180,000 Which unit would you recommend? Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since LCC's NPV of costs is lower than HCC's, LCC would be chosen. Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since HCC's NPV of costs is lower than LCC's, HCC would be chosen.…arrow_forwardKim Inc. must install a new air-conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 7%. HCC LCC 0 1 + -$600,000 -$90,000 -$50,000 -$175,000 2 3 4 5 + + -$50,000 -$50,000 -$50,000 -$175,000 -$175,000 -$175,000 -$175,000 -$50,000 a. Which unit would you recommend? 1. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. II. Since all of the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV. III. Since we are examining costs, the unit chosen would be the one that had the lower NPV of…arrow_forward
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