Calculate npv and you got the values

Assignment Help Business Management
Reference no: EM131297602

Proust Manufacturing Co. produces personal fitness machines. The once successful line is no longer selling well, so the company is considering production of a new improved cardio-vascular machine. This can be done by buying needed production equipment. There is a six-month manufacturing, delivery, setup, and training delay before the equipment will be ready for production. The company wants to start producing the new cardio machine in January next year. Two options are available - lease or buy.

Buy Option - The entire purchase price of the production equipment is $650K and is due at the time of the order. The cost of capital for this purchase is 6%. Assume: (1) the equipment has no residual value at the end of the fifth year and (2) there are no taxes.

Lease Option - The total lease cost is $550K. A $25K deposit is due at the time of the order. The remaining portion of the first year's lease payment ($85K) is due in January next year. The other four annual lease payments ($110K each) are due in January of production years 2, 3, 4, and 5. The cost of capital for leasing is 12%. Assume no taxes.

Revenue from sales of the new cardiovascular machines is expected to be:

  • Year 1 - $400,000
  • Year 2 - $350,000
  • Year 3 - $200,000
  • Year 4 - $150,000
  • Year 5 - 80,000
  1. Calculate the net present value of both the new purchase option and the lease option. Show all work. Determine the best option for Proust and justify your answer.
  2. You used the Excel NPV function to calculate NPV and you got the following values: Buy - $363,562; Lease - $464,317. What did you do wrong?
  3. Calculate IRR for each option.

Reference no: EM131297602

Questions Cloud

Why assigning integrated tasks to employees more effective : Explain why assigning integrated tasks to employees may be more effective than assigning each employee just one type of task.
Constructive internal narrative of success : What can Tim do to develop an alternative, more constructive internal narrative of success? As a coach, how would you work with Tim to confront his fear of success?
Complete portfolio should be invested in the risky portfolio : You invest $1,400 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. __________ of your complete portfol..
What is the best type of control chart : Establish a control procedure that will generate false alarms only 1% of the time (there is no lower control limit). What is the best type of control chart, and what is the necessary UCL?
Calculate npv and you got the values : Calculate the net present value of both the new purchase option and the lease option. Show all work. Determine the best option for Proust and justify your answer. You used the Excel NPV function to calculate NPV and you got the foll..
Analysts estimate next year eps : A company reported an EPS of $2.50 last year and paid a dividend of $1.00 per share. Its current stock price is $40. Analysts estimate next year EPS to be $3.00 and the payout ratio to be 40%. The trailing P/E ratio of this stock is ___
How many units should they order at a time : An Inventory Problem. How many units should they order at a time?
Describe the organizational structure of the firm : A health club differs from manufacturing firms in that it produces a service rather than products. Should manufacturing firms have a narrower span of control than service firms like CHC?
Create a flowchart containing the diamond : Create a flowchart containing the diamond which represents the pretest loop's condition in Algorithm 1.

Reviews

Write a Review

Business Management Questions & Answers

  Prepare a plan of your organizational change plan

Prepare a plan of your organizational change plan focuses on strategies for evaluating the proposed change. Describe how the effectiveness of your organizational change will be determined once it is implemented.

  Question about conflict in organizations

Describe observations and perceptions of conflict occurring at DELTA AIRLINES - Analysis. Use any theories and models learned in class that lead to an understanding of the behavioral and psychological dynamics of the situation.

  Construct spreadsheet model to help manager forecast demand

Construct a spreadsheet model to help the manager forecast demand. Assume that this technique has been in place in the previous weeks as well, and generate the forecasted demand for week 7.

  Development of alzheimer disease

Betsy is interested in predicting how many 75-year-olds will develop Alzheimer's disease and is using level of education and general physical health graded on a scale from 1 to 10 as predictors. But she is interested in using other predictor varia..

  Adopt a maturity matching approach to financing assets

How would a more aggressive or a more conservative approach differ from the maturity matching approach, and how would each affect expected profits and risk?

  What is the planning process

What is the planning process? Briefly explain each step in the process.

  Growth versus valuesbased on a solution that you assisted

growth versus valuesbased on a solution that you assisted with last year 298983 regarding ethical and social

  Implementation of tqm or total quality management

Where should the team leader come from, and what should characterize that person?  Once the team is selected, how do you think it should proceed with regard to the specific quality plans, checklists, and metrics that should be used in the implemen..

  Compute bond valuation

Create a spreadsheet model that will compute bond valuation, given the following assumptions:

  Sales targets or production targets

Class, we reward employees who exceed sales targets or production targets. Is there any reason not to likewise reward employees who exceed safety goals and/or practices that a company has established? Is not to reward a message to employees that..

  Informal institutional factors affect your venture

1. Write one or two paragraphs about your research objectives/framework. 2. List what informal institutional factors affect your venture? 3. List what informal institutional factors need to be changed by your venture?

  Managersleaders as role-modelmanagers have to exhibit the

managersleaders as role-modelmanagers have to exhibit the behaviors that they expect their followers to display. do you

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd