Chapter 11 Homework i Saved Help Save & Exit Check 3 Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa's cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa's controller: Option A $ 320,000 150,000 70,000 120,000 Initial investment Annual cash inflows Annual cash outflows Costs to rebuild Salvage value Option B $ 454,000 160,000 75,000 0 eBook Print 24,000 0 8 years References Estimated useful life 8 years Required: Calculate NPV. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.) Option A: Year Cash Flows PV factor Present Value Initial Investment 0 Annual Cash Flows 1-8 Cost to Rebuild 4 Salvage 8 Net Present Value 1.5 points $ (320,000) 80,000 (120,000) 11% 5.1461 $ 0.6587 0.4339 (320,000) 411,690 (79,048) 12.642 Option A: Year Initial Investment 0 Annual Cash Flows 1-8 Cost to Rebuild 4 Salvage 8 Net Present Value Option B: Year Initial Investment 0 Annual Cash Flows 1-8 Cost to Rebuild 4 Salvage 8 Net Present Value Determine which option Tulsa should select? $ $ Cash Flows (320,000) 80,000 (120,000) Cash Flows (454,000) 85,000 24,000 PV factor 11% 5.1461 0.6587 0.4339 PV factor Present Value $ $ Present Value 11% 5.1461 $ 0.6587 0.4339 (320,000) 411,690 (79,048) 12,642 $ (454,000) 437,420 10,414 (6,168)