Leonard owns a coffee shop. One of his coffee machines is in bad shape. He plans to overhaul the machine or replace it with another coffee machine. Coffee machines typically last for 5 years and provides annual revenues of P 15,000, and Leonard's discount rate for decision making purposes is 10%. If he gets another coffee machine, the old one will be sold right away, which he can sell for P 10,000. Here are his options. A. He can ask a machine specialist to overhaul his old coffee machine, which will cost him P 35,000. The annual repair cost for the first year will be P 1,000, which doubles every year. Scrap value is negligible. B. He can purchase a second-hand coffee machine, which will cost him P 45,000. Annual repairs will amount to P 5,000. Scrap value is negligible. C. He can purchase a brand-new coffee machine, which will cost him P 65,000. Annual repair amounting to P 4,000 will start on the third year. Scrap value of this coffee machine is negligible. Required: A. Compute for the net present value, project profitability index, and internal rate of return for each alternative. Which one should Leonard choose? Explain. B. How much is the total undiscounted cash flows for the overhaul alternative? C. Under the third alternative, how much should Leonard sell the new coffee machine for after its useful life for this alternative to be deemed acceptable? Use NPV approach to solve this problem.
Leonard owns a coffee shop. One of his coffee machines is in bad shape. He plans to overhaul the machine or replace it with another coffee machine. Coffee machines typically last for 5 years and provides annual revenues of P 15,000, and Leonard's discount rate for decision making purposes is 10%. If he gets another coffee machine, the old one will be sold right away, which he can sell for P 10,000. Here are his options. A. He can ask a machine specialist to overhaul his old coffee machine, which will cost him P 35,000. The annual repair cost for the first year will be P 1,000, which doubles every year. Scrap value is negligible. B. He can purchase a second-hand coffee machine, which will cost him P 45,000. Annual repairs will amount to P 5,000. Scrap value is negligible. C. He can purchase a brand-new coffee machine, which will cost him P 65,000. Annual repair amounting to P 4,000 will start on the third year. Scrap value of this coffee machine is negligible. Required: A. Compute for the net present value, project profitability index, and internal rate of return for each alternative. Which one should Leonard choose? Explain. B. How much is the total undiscounted cash flows for the overhaul alternative? C. Under the third alternative, how much should Leonard sell the new coffee machine for after its useful life for this alternative to be deemed acceptable? Use NPV approach to solve this problem.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Leonard owns a coffee shop. One of his coffee machines is in bad shape. He plans to overhaul the machine
or replace it with another coffee machine. Coffee machines typically last for 5 years and provides annual
revenues of P 15,000, and Leonard's discount rate for decision making purposes is 10%. If he gets another
coffee machine, the old one will be sold right away, which he can sell for P 10,000. Here are his options.
A. He can ask a machine specialist to overhaul his old coffee machine, which will cost him P 35,000. The
annual repair cost for the first year will be P 1,000, which doubles every year. Scrap value is negligible.
B. He can purchase a second-hand coffee machine, which will cost him P 45,000. Annual repairs will
amount to P 5,000. Scrap value is negligible.
C. He can purchase a brand-new coffee machine, which will cost him P 65,000. Annual repair amounting
to P 4,000 will start on the third year. Scrap value of this coffee machine is negligible.
Required:
A. Compute for the net present value, project profitability index, and internal rate of return for each
alternative. Which one should Leonard choose? Explain.
B. How much is the total undiscounted cash flows for the overhaul alternative?
C. Under the third alternative, how much should Leonard sell the new coffee machine for after its useful
life for this alternative to be deemed acceptable? Use NPV approach to solve this problem.
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