Alpha company is trying to install a new machine that has estimated cost Rs. 200,000 by...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Alpha company is trying to install a new machine that has estimated cost Rs. 200,000 by replacing an old machine. The new machine required installation cost Rs. 20,000. The expected increase in working capital would be Rs. 25,000. The old machine was purchased 3 years ago and estimated that it would last for six years at the time of purchased. The current book and cash salvage value of the old machine is Rs. 40,000 and 60,000 respectively. The estimated book and cash salvage value of new machine at the end of year three would be Rs. 50,000 and 70,000 respectively. The cost of capital is 10% and risk premium is to be estimated 6%. Assume the probability distributions of cash flow for future period are independent. In order to accommodate probability distribution the company has adopted a policy to equal final year effects with investment cost. The expected incremental net cash flow and corresponding probabilities are as follows: Year 1 CFAT Rs 80,000 70,000 60,000 50,000 40,000 Required: 0 Probability 0.1 0.2 0.4 0.2 0.1 Year 2 CFAT Rs 70,000 60,000 50,000 40,000 30,000 Probability 0.1 0.2 0.4 02 0.1 Year 3 CFAT Rs tions 30,000 40,000 50,000 60,000 65,000 Probability 0.1 0.2 0.4 0.2 0.1 Should the company replace the existing machine? Probability of profitability index being less than 1.20. Ans: NCO = Rs. 10,990; NPV = Rs. 37,935.5; ONPV = 17,156.43 NPV = Rs. 21,998; 17.62% Alpha company is trying to install a new machine that has estimated cost Rs. 200,000 by replacing an old machine. The new machine required installation cost Rs. 20,000. The expected increase in working capital would be Rs. 25,000. The old machine was purchased 3 years ago and estimated that it would last for six years at the time of purchased. The current book and cash salvage value of the old machine is Rs. 40,000 and 60,000 respectively. The estimated book and cash salvage value of new machine at the end of year three would be Rs. 50,000 and 70,000 respectively. The cost of capital is 10% and risk premium is to be estimated 6%. Assume the probability distributions of cash flow for future period are independent. In order to accommodate probability distribution the company has adopted a policy to equal final year effects with investment cost. The expected incremental net cash flow and corresponding probabilities are as follows: Year 1 CFAT Rs 80,000 70,000 60,000 50,000 40,000 Required: 0 Probability 0.1 0.2 0.4 0.2 0.1 Year 2 CFAT Rs 70,000 60,000 50,000 40,000 30,000 Probability 0.1 0.2 0.4 02 0.1 Year 3 CFAT Rs tions 30,000 40,000 50,000 60,000 65,000 Probability 0.1 0.2 0.4 0.2 0.1 Should the company replace the existing machine? Probability of profitability index being less than 1.20. Ans: NCO = Rs. 10,990; NPV = Rs. 37,935.5; ONPV = 17,156.43 NPV = Rs. 21,998; 17.62% Alpha company is trying to install a new machine that has estimated cost Rs. 200,000 by replacing an old machine. The new machine required installation cost Rs. 20,000. The expected increase in working capital would be Rs. 25,000. The old machine was purchased 3 years ago and estimated that it would last for six years at the time of purchased. The current book and cash salvage value of the old machine is Rs. 40,000 and 60,000 respectively. The estimated book and cash salvage value of new machine at the end of year three would be Rs. 50,000 and 70,000 respectively. The cost of capital is 10% and risk premium is to be estimated 6%. Assume the probability distributions of cash flow for future period are independent. In order to accommodate probability distribution the company has adopted a policy to equal final year effects with investment cost. The expected incremental net cash flow and corresponding probabilities are as follows: Year 1 CFAT Rs 80,000 70,000 60,000 50,000 40,000 Required: 0 Probability 0.1 0.2 0.4 0.2 0.1 Year 2 CFAT Rs 70,000 60,000 50,000 40,000 30,000 Probability 0.1 0.2 0.4 02 0.1 Year 3 CFAT Rs tions 30,000 40,000 50,000 60,000 65,000 Probability 0.1 0.2 0.4 0.2 0.1 Should the company replace the existing machine? Probability of profitability index being less than 1.20. Ans: NCO = Rs. 10,990; NPV = Rs. 37,935.5; ONPV = 17,156.43 NPV = Rs. 21,998; 17.62%
Expert Answer:
Answer rating: 100% (QA)
To determine whether the company should replace the existing machine we can calculate the Net Presen... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Grocery run on the road trip is coming! Suppose the shape of the egg you wish to buy are ellipsoids with the volume formula Volume ryz where x, y, z are the radil of the item. Write a higher-order...
-
An article in the local newspaper stated that the county government had decided to condemn Palo Alto, Inc.'sdistributionwarehouse. Therefore, Palo Alto decided to sale its warehouse to obtain what it...
-
William Lake Forest Products (WLFP) is an integrated paper products firm. Planning for the period's activities begins with the wood lot. The maximum amount of raw wood that can be harvested during...
-
12. Assume that the government has placed a regulation on the emission from diesel that will increase the cost of diesel. Graphically and verbally describe the impacts of this regulation on the...
-
What is the penalty for scientific fraud in the science community?
-
Let g(x) be the function pictured in Fig. 26. Determine whether 0 7 g(x)dx is positive, negative, or zero. 2 1 -1 -2 -3 Y y = g(x) HH + 1 2 3 4 5 6 7 8 Figure 26 foto. + +x
-
Reconsider the data from Problem 56. What is the capital recovery cost of Model 127B? Data from problem 56 Octavia Bakery is planning to purchase one of two ovens. The expected cash flows for each...
-
A common-size income statement for Creek Enterprises 2011 operations follows. Using the firms 2012 income statement presented in Problem 318, develop the 2012 common-size income statement and compare...
-
Discuss each of the following terms: (a) data (b) database (c) database management system (d) database application program (e) data independence (f) security (g) integrity (h) views 2. What is...
-
Marty Hamilton, a 49-year-old carpenter, has just been diagnosed with cirrhosis, which is a consequence of his alcohol abuse over the past 25 years. Although he recognizes that he has an alcohol...
-
What other advantages can BCM gain from partnering with EMAs, NGOs, and other business continuity professionals? What other activities in one phase affect activities in another? In addition to RA and...
-
The domain of f(x) = 2 arcsin(2-e') is
-
Evaluate C4 and 11P 4.
-
1) The CEO would like to see higher sales and a forecasted net income of $250,000. Assume that operating costs (excluding depreciation) will remain at 55% of sales, depreciation expense will increase...
-
Nvidia, one of the world's largest semiconductor companies that manufacture microchips, reported earnings per share in 2021 of $3.95, and paid dividends per share of $0.68. Its earnings were expected...
-
Mention the important macromolecules in Biochemistry. And provide examples.
-
The Ranch 888 Noodle Company sells two types of dried noodles:ramen, at $6.50 per box, and chow fun, at $7.70 per box. So farthis year, the company has sold a total of 110,096 boxes ofnoodles,...
-
Maintenance money for a new building has been sought. Mr. Kendall would like to make a donation to cover all future expected maintenance costs for the building. These maintenance costs are expected...
-
A special-purpose machine tool set would cost $20,000. The tool set will be financed by a $10,000 bank loan repayable in two equal annual installments at 10% compounded annually. The tool is expected...
-
The pharmaceutical industry is composed of both large and small firms competing for new research, the introduction of new products, and the sales of existing products. Performing research and...
-
Many hotel jobs are inherently dead end; for example, maids, laundry workers, and valets, either have no great aspirations to move up, or are just using these jobs temporarily, for instance, to help...
-
Using what you learned in this chapter of Dessler Human Resource Management, build on the companys new system by recommending two more specific career development activities the hotel should...
-
Should other employees (cleaner/spotters, counter people) be put on a similar plan? Why or why not? If so, how exactly?
Study smarter with the SolutionInn App