Byer, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $50,000 and would have a residual value of $3000 at the end of its 6-year life. The annual operating expenses of the new extruder would be $5000. The other option that Byer 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 6 years. The existing extruder has annual operating costs of $13,000 per year and does not have a residual value. Byer's discount rate is 12%. Using net present value analysis, which option is the better option and by how much? Present Value of $1 Periods 12% 14% 16% 6 0.507 0.456 0.410 8 0.404 0.351 0.305 10 0.322 0.270 0.227 12 0.257 0.208 0.168Present Value of Annuity of $1 Periods 12% 14% 16% 6 4.111 3.889 3.685 8 4.968 4.639 4.344 10 5.650 5.216 4.833 12 6.194 5.660 5.197

Question

Business

Kadence Fletcher

22 September, 12:52

Byer, a plastics processor, is considering the purchase of a high-speed extruder as one option. The new extruder would cost $50,000 and would have a residual value of $3000 at the end of its 6-year life. The annual operating expenses of the new extruder would be $5000. The other option that Byer 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 6 years. The existing extruder has annual operating costs of $13,000 per year and does not have a residual value. Byer's discount rate is 12%. Using net present value analysis, which option is the better option and by how much? Present Value of $1 Periods 12% 14% 16% 6 0.507 0.456 0.410 8 0.404 0.351 0.305 10 0.322 0.270 0.227 12 0.257 0.208 0.168Present Value of Annuity of $1 Periods 12% 14% 16% 6 4.111 3.889 3.685 8 4.968 4.639 4.344 10 5.650 5.216 4.833 12 6.194 5.660 5.197

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Answers (1)

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Greyson Clark · Answer 1

Option of the new extruder is better by $14,411.16

Explanation:

The present value of each option needs to be determined in order that the cheaper option in present value terms can be recommended.

Present value of new extruder=$50,000 / (1+12%) ^0+$5000 / (1+12%) ^1+$5000 / (1+12%) ^2+$5000 / (1+12%) ^3+$5000 / (1+12%) ^4+$5000 / (1+12%) ^5+$5000 / (1+12%) ^6-$3000 / (1+12%) ^6=$ 69,037.14

The discount factor each year=1 / (1+r) ^n where is 12% discount rate and n is the year

resent value of old extruder=$30,000 / (1+12%) ^0+$13,000 / (1+12%) ^1+$13000 / (1+12%) ^2+$13000 / (1+12%) ^3+$13000 / (1+12%) ^4+$13000 / (1+12%) ^5+$13000 / (1+12%) ^6=$ 83,448.30

The first option is better since it has a lower preset value of costs of $ 69,037.14

Difference in PVs = 83,448.30-69,037.14=$14,411.16