(Present value tables are required. )Figgey,a plastics processor,is considering the purchase of a high-speed extruder as one option.The new extruder would cost $52,000 and would have a residual value of $5,000 at the end of its 8-year life.The annual operating expenses of the new extruder would be $8,000.The other option that Figgey has is to rebuild its existing extruder.The rebuilding would require an investment of $30,000 and would extend the life of the existing extruder by 8 years.The existing extruder has annual operating costs of $11,000 per year and does not have a residual value.Figgey discount rate is 14%.Using net present value analysis,which option is the better option and by how much?

Question

Quizplus · Accepted Answer

To determine the net present value (NPV) of each option, we must first calculate the present value of the annual operating expenses for each option over the 8-year period. We will use the present value of an annuity table (PVoa) to calculate these values.

For the new extruder:
PVoa(14%, 8 years, $8,000 per year) = $47,155

For the existing extruder:
PVoa(14%, 8 years, $11,000 per year) = $62,802

Next, we must calculate the present value of each initial investment and residual value using the present value of a single amount table (PV). For the new extruder, we will subtract the residual value from the initial cost since it has a residual value:

PV(14%, 0 years, -$52,000 + $5,000) = -$43,671

For the existing extruder, we will only calculate the present value of the initial investment:

PV(14%, 0 years, -$30,000) = -$30,000

Now we can calculate the NPV of each option using the formula:

NPV = PV of future cash flows - PV of initial investment

For the new extruder:
NPV = $47,155 - $43,671 = $3,484

For the existing extruder:
NPV = $62,802 - $30,000 = $32,802

Therefore, the better option is to rebuild the existing extruder, which has a higher NPV of $32,802 compared to the NPV of the new extruder of $3,484. The difference between the two options is $29,318, which means that rebuilding the existing extruder is better by $6,328 (rounded to the nearest dollar).

(Present Value Tables Are Required