The company plans to get a new machine to increase its capacity. There are two machines...

 

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The company plans to get a new machine to increase its capacity. There are two machines can be selected: A and B. The lifetime of machine A or B is 4 years (value decrease to O at the end of year 4). The cash flows are shown below: Cash flows ($) Year 0 -50000 -50000 a) Based on the payback rule, which Machine should the company buy? Machine A B Year 1 10000 10000 Year 2 20000 40000 Year 3 30000 10000 Year 4 20000 10000 b) Based on the net present value, which Machine should the company buy? (Assume the required rate of return k is 5%). c) For the $50000 investment, the company has two plans: • Plan A: use $10000 from the company and borrow $40000 from the bank to buy the machine. The borrowed money will be paid annually back to the bank (Equal loan payment) with an annual interest of 5% in 4 years. The maintenance is $1000 for each year paid by the company. • Plan B: lease the machine from the supplier with an annual payment of $15000 for two years and purchase the machine at the end of year 2 for $20000. The maintenance fee for the first two years is paid by the supplier and for the last two years is $1200 annually (paid by the company). The tax rate is 40% and the depreciation is a straight line (same amount every year). Based on the total present value cost (assume the discount rate is 5%), which plan should the company use? The company plans to get a new machine to increase its capacity. There are two machines can be selected: A and B. The lifetime of machine A or B is 4 years (value decrease to O at the end of year 4). The cash flows are shown below: Cash flows ($) Year 0 -50000 -50000 a) Based on the payback rule, which Machine should the company buy? Machine A B Year 1 10000 10000 Year 2 20000 40000 Year 3 30000 10000 Year 4 20000 10000 b) Based on the net present value, which Machine should the company buy? (Assume the required rate of return k is 5%). c) For the $50000 investment, the company has two plans: • Plan A: use $10000 from the company and borrow $40000 from the bank to buy the machine. The borrowed money will be paid annually back to the bank (Equal loan payment) with an annual interest of 5% in 4 years. The maintenance is $1000 for each year paid by the company. • Plan B: lease the machine from the supplier with an annual payment of $15000 for two years and purchase the machine at the end of year 2 for $20000. The maintenance fee for the first two years is paid by the supplier and for the last two years is $1200 annually (paid by the company). The tax rate is 40% and the depreciation is a straight line (same amount every year). Based on the total present value cost (assume the discount rate is 5%), which plan should the company use?

Answer rating: 100% (QA)

SOLUTION a To determine which machine the company should buy based on the payback rule we need to calculate the payback period for each machine The payback period is the length of time it takes for th... View the full answer