Present value of the new purchase option

Assignment Help Business Management
Reference no: EM131302539

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: EM131302539

Questions Cloud

Analyze how benefits costs and risks impacted negotiation : Analyze two of the following three roles and how they contributed to - or detracted from - your described negotiation situation.Analyze how benefits, costs, and risks impacted the negotiation.
Can you suggest some productivityenhancing measures : Collect data on the tuition rates of your own college in the last twenty years and compare that increase to the overall rate of inflation using the CPI. What do you observe? Can you suggest some productivityenhancing measures?
Why do you believe that msram has become a favored : Why has risk modeling become pervasive in the security management professions?Why do you believe that MSRAM has become a favored Risk Management tool? Just because it was first? Per the Daniel Benjamin article in your readings how might numbers and..
Why each type of information may be important to the person : Choose one category and provide examples of the types of information the person would be interested in. Explain why each type of information may be important to the person.
Present value of the new purchase option : 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.
Describe the content and techniques that will be used : Identify and describe the content, format, tools, and techniques that will be used in your learning project. Detail who, what, when, where, why and how the learning and management will occur.
How should jetson decide on the optimal level of inventory : In the short run, the percentage increase in output tends to correspond to a smaller percentage decrease in the unemployment rate due to "slippages." Explain the three slippages between changes in output and changes in the unemployment rate.
Evaluate two proposed alternatives regarding insulin pump : Evaluate the two proposed alternatives regarding the insulin pump.- Based upon your evaluation identify which alternative should be selected and support your decision.
Should certified bmw be concerned about multicollinearity : Should Certified BMW be concerned about multicollinearity in this equation? Why or why not? If multicollinearity is a problem, how would you address it in this estimation? Use the regression equation to predict price for the first observation in th..

Reviews

Write a Review

Business Management Questions & Answers

  Innovation and organic competition

Do you think that innovation and organic competition are sufficient to keep monopoly firms in check? Don't just offer your opinion, include evidence to back it up.

  Total household consumption component of the gdp

The GPI's gains in accuracy are paid for by a significantly increased complexity. The formula begins with the total household consumption component of the GDP (roughly 60% of its total value), and moves it through a series of adjustments as follow..

  Mental model mindsetare mindsets simply shortcuts do we

mental model mindsetare mindsets simply shortcuts? do we really have time to be open-minded to every situation and

  Distinguish between own-price elasticity of demand

Distinguish between own-price elasticity of demand and cross- elasticity of demand? Briefly discuss the factors which affect the own price elasticity of demand?

  Key issues in supply chain management

1. Explain the difficulties and key issues in supply chain management. Reference

  Describe the considerations in each of these areas

Describe the considerations in each of these areas listed below, both positive & negative and then defend your decision. Please write at least one and half page, 12 front, double space.

  Determining the key elements of leadership

Determine the key elements of leadership you would need to be successful in your business venture. Explain your rationale.

  Finding a population variance and standard deviation

1. State the general formula for finding a population variance and standard deviation. What do these values indicate? Find the population variance and standard deviation for the following population values: 80, 90, 100 and 130. Note: on an actu..

  Estimate the social cost of the loss

Imagine that a CV method is used to estimate the social cost of the loss of each of these streams. Would you be equally confident in the two sets of estimates? Why?

  Multi-attribute evaluation tool using ms excel

Your manager has decided to reduce the number of suppliers for a critical subassembly from three to two. She has asked you to review the three current suppliers (A, B, and C) and to recommend which one to eliminate from the approved suppliers list..

  Discussing briefly describe what issues

A 4-page (double-spaced) paper discussing briefly describe what issues led up to Delta going bankrupt and what they did to recover Please utilize at least 3 textbook citations and 3 other scholarly citations to support the discussion. And a 3 slid..

  Who bears the loss for a shipment of missing watches

On March 4, Pedro Pestana, a resident of Chetumal, Mexico, entered into a contract in which he agreed to purchase from the Karinol Corporation, a company based in Miami, Florida, 64 watches for $6,006.An employee of Karinol Corporation wrote the c..

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