Prvoide detail explanation Which project will you realize? Net Present Value Calculation You manage a small company

Prvoide detail explanation

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Which project will you realize? Net Present Value Calculation You manage a small company producing plastic pallets. Your (business) customers are companies using plastics in various forms and colors for their own production. They supply modules like furniture parts, toys, car interior and engine parts etc. You consider expanding your capacity with another machine to produce plastic pallets (extruder). However, you have to decide between two alternative ma- chines A and B. You have already negotiated with the two competitors, thus the two machines have the same pur- chase price of 650,000. However, they differ with respect to their capacity and maintenance/personnel cost. Here are the expected revenues and costs of machines A and B: Period (t) 1 2345 Revenues 140,000 150,000 180,000 200,000 240,000 Machine A Costs 1,500 1,800 2,600 3,200 4,000 Machine B Revenues 100,000 120,000 220,000 240,000 244,000 Costs 1,200 1,400 2,800 3,000 3,100 Que on 4: (45 Points) a) Calculate the net present value of machines A and B. Assume opportunity cost of capital of 10%. Even though the machines are depreciated over 10 years, only calculate until the 5th year (t=5). Interpret the NPVs in t=5 and decide which machine you will buy (please argue). b) Describe the limitations of the net present value criterion and illustrate your description with this case as an example. Which project will you realize? Net Present Value Calculation You manage a small company producing plastic pallets. Your (business) customers are companies using plastics in various forms and colors for their own production. They supply modules like furniture parts, toys, car interior and engine parts etc. You consider expanding your capacity with another machine to produce plastic pallets (extruder). However, you have to decide between two alternative ma- chines A and B. You have already negotiated with the two competitors, thus the two machines have the same pur- chase price of 650,000. However, they differ with respect to their capacity and maintenance/personnel cost. Here are the expected revenues and costs of machines A and B: Period (t) 1 2345 Revenues 140,000 150,000 180,000 200,000 240,000 Machine A Costs 1,500 1,800 2,600 3,200 4,000 Machine B Revenues 100,000 120,000 220,000 240,000 244,000 Costs 1,200 1,400 2,800 3,000 3,100 Que on 4: (45 Points) a) Calculate the net present value of machines A and B. Assume opportunity cost of capital of 10%. Even though the machines are depreciated over 10 years, only calculate until the 5th year (t=5). Interpret the NPVs in t=5 and decide which machine you will buy (please argue). b) Describe the limitations of the net present value criterion and illustrate your description with this case as an example.

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a The cash flows produced by each machine over the course of the five years must be discounted at the opportunity cost of capital which is 10 in order ... View the full answer