Sandy of Sandys Submarine Sandwiches was considering two different types of sandwich toasters. The first option costs

Question:

Sandy of Sandy’s Submarine Sandwiches was considering two different types of sandwich toasters. The first option costs $80,000, had a ten-year life and a $1,000 salvage value. The second option costs only $60,000, but had only an eight-year life (and still $1,000 salvage value). His business’s weighted average cost of capital is 25%. Sandy has figured his cash flows and profits for the life of both toasters and it is shown in the following table:











 Option A


 Option B



Years

Cash Flow

Profits


Cash Flow

Profits



0

-80,000



-60,000




1

10,000

3,000


5,000

2,000



2

20,000

6,000


10,000

3,000



3

20,000

6,000


20,000

4,500



4

20,000

6,000


30,000

7,500



5

25,000

10,000


40,000

9,500



6

25,000

10,000


50,000

11,000



7

30,000

15,000


50,000

11,000



8

30,000

15,000


50,000

11,000



9

35,000

17,500


0

0



10

40,000

20,000


0

0



Total


108500



59500










What are the payback periods and return on investment for each of these options? Which toaster should he buy?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Entrepreneurial Small Business

ISBN: 978-1259573798

5th edition

Authors: Jerome Katz, Richard Green

Question Posted: