Problem 19.25 (Algorithmic) Discount Rates, Quality, Market Share, Contemporary Manufacturing Environment

Sweeney Manufacturing has a plant where the equipment is essentially worn out. The equipment must be replaced, and Sweeney is considering two competing investment alternatives. The first alternative would replace the worn-out equipment with traditional production equipment; the second alternative uses contemporary technology and has computer-aided design and manufacturing capabilities. The investment and after-tax operating cash flows for each alternative are as follows:

Year	Traditional Equipment	Contemporary Technology
0	$(1,009,750)	$(3,998,000)
1	594,850	202,450
2	397,700	395,650
3	190,250	605,950
4	190,250	799,350
5	190,250	799,350
6	190,250	799,350
7	190,250	992,450
8	190,250	2,009,350
9	190,250	2,009,350
10	190,250	2,009,350

The company uses a discount rate of 18 percent for all of its investments. The company's cost of capital is 14 percent.

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

EXHIBIT 19B.1 Present Value of $1 Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 40% 0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781 0.769 0.758 0.714 0.961 0.925 0.890 0.857 0.826 0.797 0.769 0.743 0.718 0.694. 0.672 0.650 0.630 0.610 0.592 0.574. 0.510 0.942 0.889 0,840 0.794 0.751 0.712 0.675 0.641 0,609 0.579 0,551 0.524. 0.500 0,477 0.455 0.435 0.364 0.924 0.855 0.792 0.735 0.683 0.636 0.592 0.552 0.516 0.482 0.451 0.423 0.397 0.373 0.350 0.329 0.260 0.906 0.822 0.747 0.681 0.621 0.567 0.519 0.476 0.437 0.402 0.370 0.341 0.315 0.291 0.269 0.250 0.186 0.888 0.790 0,705 0.636 0.564 0.507 0.456 0.410 0.370 0.335 0.303 0.275 0.250 0.227 0.207 0.189 0.133 0.871 0.760 0.665 0.583 0.513 0.452 0.400 0.354 0.314 0.279 0.249 0.222 0.198 0.178 0.159 0.143 0.095 0.853 0.731 0.627 0.540 0.467 0.404. 0.351 0.305 0.266 0.233 0.204 0.179 0.157 0.139 0.123 0.108 0.068 0.837 0.703 0,592 0.500 0,424 0.361 0.308 0.263 0.225 0.194. 0.167 0.144 0.125 0.108 0.094 0.082 0.048 10 0.820 0.676 0.558 0.463 0.386 0.322 0.270 0.227 0.191 0.162 0.137 0.116 0.099 0.085 0.073 0.062 0.035 11 0.804 0.650 0.527 0.429 0.350 0.287 0.237 0.195 0.162 0.135 0.112 0.094 0.079 0.066 0.056 0.046 0.025 0.788 0.625 0.497 0.397 0.319 0.257 0,208 0.168 0.137 0.112 0.092 0.076 0.062 0.052 0.043 0.036 0.018 13 0.773 0.601 0.469 0.368 0.290 0.229 0.182 0.145 0.116 0.093 0.075 0.061 0.050 0.040 0.033 0.027 0.013 0.758 0.577 0.442 0.340 0.263 0.205 0.160 0.125 0.099 0.078 0.062 0.049 0.039 0.032 0.025 0.021 0.009 15 0.743 0.555 0.417 0.315 0.239 0.183 0.140 0.108 0.084 0.065 0.051 0.040 0.031 0.025 0.020 0.016 0.006 0.728 0.534 0.394 0.292 0.218 0.163 0.123 0.093 0.071 0.054 0.042 0.032 0.025 0.019 0.015 0.012 0.005 17 0.714 0.513 0.371 0.270 0.198 0.146 0.108 0.080 0.060 0.045 0.034 0.026 0.020 0.015 0.012 0.009 0.003 18 0.700 0.494. 0.350 0.250 0.180 0.130 0.095 0.069 0.051 0.038 0.028 0.021 0,016 0.012 0.009 0.007 0.002 19 0.686 0.475 0.331 0.232 0.164 0.116 0.083 0.060 0.043 0.031 0.023 0.017 0.012 0.009 0.007 0.005 0.002 0.673 0.456 0.312 0.215 0.149 0.104 0.073 0.051 0.037 0.026 0.019 0.014 0.010 0.007 0.005 0.004. 0.001 21 0.660 0.439 0.294 0.199 0,135 0.093 0.064 0.044 0.031 0.022 0.015 0.011 0.008 0.006 0.004 0.003 0.001 0.647 0.422 0.278 0.184 0.123 0.083 0.056 0.038 0.026 0.018 0.013 0.009 0.006 0.004. 0.003 0.002 0.001 0.634 0.406 0.262 0.170 0.112 0.074 0.049 0.033 0.022 0.015 0.010 0.007 0.005 0.003 0.002 0.002 0.000 0.622 0.390 0.247 0.158 0.102 0.066 0.043 0.028 0,019 0.013 0.008 0.006 0.004 0.003 0.002 0.001 0.000 0.610 0.375 0.233 0.146 0.092 0.059 0.038 0.024 0.016 0.010 0,007 0.005 0.003 0.002 0.001 0.001 0.000 26 0.598 0.361 0.220 0.135 0.084 0.053 0.033 0.021 0.014 0.009 0.006 0.004 0.002 0.002 0.001 0.001 0.000 27 0.586 0.347 0.207 0.125 0.076 0.047 0,029 0.018 0,011 0,007 0,005 0.003 0,002 0.001 0,001 0,001 0,000 0.574 0.333 0.196 0.116 0.069 0.042 0.026 0.016 0.010 0.006 0.004 0.002 0.002 0.001 0.001 0.000 0.000 28 29 0.563 0.321 0.185 0.107 0.063 0.037 0.022 0.014 0.008 0.005 0.003 0.002 0.001 0.001 0.000 0.000 0.000 0.552 0.308 0,174 0.099 0.057 0.033 0.020 0.012 0.007 0,004 0.003 0.002 0.001 0,001 0,000 0,000 0,000