Please answer number 14 and 15. Thank you so much in advance. che Brothers is co
ID: 2819008 • Letter: P
Question
Please answer number 14 and 15. Thank you so much in advance.
che Brothers is considering a capacity expansion of its supermarket. The landowner will build the addi- tion to suit in return for $200,000 upon completion and a 5-year lease. The increase in rent for the addition is $10,000 per month. The annual sales projected through year 5 follow. The current effective capacity is equiva lent to 500,000 customers per year. Assume a 2 percent pretax profit on sales. 14 Year 2 3 5 Customers 560,000 600,000 685,000 700,000 715,000 Average Sales $50.00 $53.00 $56.00 $60.00 $64.00 per Customer a. If Roche expands its capacity to serve 700,000 customers per year now (end of year 0), what are the projected annual incremental pretax cash flows attributable to this expansion? b. If Roche expands its capacity to serve 700,o00 customers per year a end of year 2. the land owner will build the same addition for $240,000 and a 3-year lease at $12,000 per month. What are the projected annual incremental pretax cash flows attributable to this expansion alternative? 15. MiM Internationa is seeking to purchase a new machine in order to reduce costs. Two alterna- tive machines are in consideration. Machine 1 costs $500,000 but yields a 15 percent savings over the cur rent machine used. Machine 2 costs $900,000 but yields 25 percent savings over the current machine used. In order to meet demand, the following forecasted cost information for the current machine is also provided a. Based on the NPV of the cash flows for these five years, which machine should MKM International Purchase? Assume discount rate of 12 percent. b. If MKM International lowered its required discount rate to 8 percent, what machine would it purchase? Year 2 3 4 5 Projected Cost 1,000,000 1,350,000 1,400,000 1,450,000 2.550,0OOExplanation / Answer
This below sheet contains detailed formulas:
15.
Saving in cost for both machines:
Year
Projected Cost of current machine
Saving in cost for Machine-1 @15%
Saving in cost for Machine-1 @25%
1
1,000,000
150,000
250,000
2
1,350,000
202,500
337,500
3
1,400,000
210,000
350,000
4
1,450,000
217,500
362,500
5
2,550,000
382,500
637,500
(a)
Computation of NPV if discount rate is 12%:
Machine-1
Machine-2
Year
Present Value Factor @ 12%
Cash Flow
Present Value
Cash Flow
Present Value
0
1
-500,000
-500,000
-900,000
-900,000
1
0.8929
150,000
133,935
250,000
223,225
2
0.7972
202,500
161,433
337,500
269,055
3
0.7118
210,000
149,478
350,000
249,130
4
0.6355
217,500
138,221
362,500
230,369
5
0.5674
382,500
217,031
637,500
361,718
Net Present Value (NPV)
300,098
433,497
Since NPV of Machine-2 is more than Machine-1 therefore MKM International should purchase Machine-2.
Computation of NPV if discount rate is 8%:
Machine-1
Machine-2
Year
Present Value Factor @ 8%
Cash Flow
Present Value
Cash Flow
Present Value
0
1
-500,000
-500,000
-900,000
-900,000
1
0.9259
150,000
138,885
250,000
231,475
2
0.8573
202,500
173,603
337,500
289,339
3
0.7938
210,000
166,698
350,000
277,830
4
0.7350
217,500
159,863
362,500
266,438
5
0.6806
382,500
260,330
637,500
433,883
Net Present Value (NPV)
399,379
598,965
Since NPV of Machine-2 is more than Machine-1 therefore MKM International should purchase Machine-2.
Year
Projected Cost of current machine
Saving in cost for Machine-1 @15%
Saving in cost for Machine-1 @25%
1
1,000,000
150,000
250,000
2
1,350,000
202,500
337,500
3
1,400,000
210,000
350,000
4
1,450,000
217,500
362,500
5
2,550,000
382,500
637,500