Pronto Cleaners, a chain of dry- cleaning stores, has the opportunity to invest in one of...

 

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Pronto Cleaners, a chain of dry- cleaning stores, has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of $30,000. It will cost an additional $6,500 to have the machine delivered and installed, and the expected residual value at the end of four years is $4,000. Machine B has a four-year expected life and a cost of $55,000. It will cost an additional $7,000 to have the machine delivered and installed, and the expected residual value at the end of four years is $6,000. Pronto has a required rate of return of 14 percent. Additional cash flows related to the machines are as follows: Machine A Item Year 1 Year 2 Year 3 Year 4 Labor saving Power saving Chemical saving $25,000 $25,000 $25,000 $25,000 1,500 3,000 (1,200) (2,500) 1,500 1,500 1,500 3,000 (1,200) (2,500) 3,000 3,000 (1,200) (2,500) Additional maintenance (1,200) (2,500) Additional miscellaneous Machine B Item Year 1 Year 2 Year 3 Year 4 Labor saving Power saving Chemical saving $32,000 2,000 3,500 (1,500) (2,700) $32,000 2,000 3,500 (1,500) (2,700) $32,000 2,000 $32,000 3,500 (1,500) (2,700) 2,000 3,500 (1,500) (2,700) Additional maintenance Additional miscellaneous Required a. Ignoring taxes, determine the net present value of investing in machine A. b. Ignoring taxes, determine the net present value of investing in machine B. c. Which, if any, machine should be purchased? Pronto Cleaners, a chain of dry- cleaning stores, has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of $30,000. It will cost an additional $6,500 to have the machine delivered and installed, and the expected residual value at the end of four years is $4,000. Machine B has a four-year expected life and a cost of $55,000. It will cost an additional $7,000 to have the machine delivered and installed, and the expected residual value at the end of four years is $6,000. Pronto has a required rate of return of 14 percent. Additional cash flows related to the machines are as follows: Machine A Item Year 1 Year 2 Year 3 Year 4 Labor saving Power saving Chemical saving $25,000 $25,000 $25,000 $25,000 1,500 3,000 (1,200) (2,500) 1,500 1,500 1,500 3,000 (1,200) (2,500) 3,000 3,000 (1,200) (2,500) Additional maintenance (1,200) (2,500) Additional miscellaneous Machine B Item Year 1 Year 2 Year 3 Year 4 Labor saving Power saving Chemical saving $32,000 2,000 3,500 (1,500) (2,700) $32,000 2,000 3,500 (1,500) (2,700) $32,000 2,000 $32,000 3,500 (1,500) (2,700) 2,000 3,500 (1,500) (2,700) Additional maintenance Additional miscellaneous Required a. Ignoring taxes, determine the net present value of investing in machine A. b. Ignoring taxes, determine the net present value of investing in machine B. c. Which, if any, machine should be purchased?

Answer rating: 100% (QA)

a Ignoring taxes determine the net present value of in... View the full answer