Foremost Restaurant Suppliers is considering the purchase of new equipment that will improve both the efficiency and quality of the frozen food products. Two alternative pieces of equipment are being considered. Either alternative would enable Foremost to reduce liability insurance costs and better meet health department requirements, so the managers have decided to install new equipment. However, they are not certain which alternative is the most appropriate. One alternative costs $50,000 to install and $12,000 annually to maintain. The second costs $75,000 to install and $5,000 annually to maintain. Each has a 5-year income tax life and a 7-year useful life. Foremost's discount rate is 12%, and its income tax rate is 30%. It uses straight line amortization (ignore the half-year convention).
a)Which system should be installed? Provide computations to support your answer.
b)If Foremost were a not-for-profit organization that provided meals for public schools and did not pay income taxes on its operations, which system should be installed? Provide computations to support your answer.
c)Explain why the managers of Foremost cannot be certain that the organization will achieve the NPV results.
d)Which option involves greater risk to Foremost? Explain.

Question

Quizplus · Accepted Answer

The Answer of Foremost Restaurant Suppliers is considering the purchase of new equipment that will improve both the efficiency and quality of the frozen food products. Two alternative pieces of equipment are being considered. Either alternative would enable Foremost to reduce liability insurance costs and better meet health department requirements, so the managers have decided to install new equipment. However, they are not certain which alternative is the most appropriate. One alternative costs $50,000 to install and $12,000 annually to maintain. The second costs $75,000 to install and $5,000 annually to maintain. Each has a 5-year income tax life and a 7-year useful life. Foremost's discount rate is 12%, and its income tax rate is 30%. It uses straight line amortization (ignore the half-year convention).
a)Which system should be installed? Provide computations to support your answer.
b)If Foremost were a not-for-profit organization that provided meals for public schools and did not pay income taxes on its operations, which system should be installed? Provide computations to support your answer.
c)Explain why the managers of Foremost cannot be certain that the organization will achieve the NPV results.
d)Which option involves greater risk to Foremost? Explain.

Foremost Restaurant Suppliers Is Considering the Purchase of New Equipment