Over the River Bridge Company needs to replace its CNC Machiningline. They have 3...

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Accounting

Over the River Bridge Company needs to replace its CNC Machiningline. They have 3 different options for the replacement.
Option 1:
Replace the worn-out equipment with the same equipment. Thequoted price of this equipment is $16,500,000 due in full upondelivery. This equipment uses $185,000 of electricity a year. Ithas a service life of 5 years. It has a scrap value of$375,000.
Option 2:
Replace the worn-out equipment with Eco-CNC equipment. Thequoted price of this equipment is $17,800,000 payable in 5 equalinstallments of 3,560,000 starting at delivery. This equipment uses$96,000 of electricity a year. It has a service life of 5 years.Ithas a scrap value of $475,000.
Option 3:
Replace the worn-out equipment with Bargain Shack equipment. Thequoted price of this equipment is $9,000,000 where half is payableupon delivery and the remainder is payable in 1 year afterdelivery. This equipment uses $135,000 of electricity a year. Ithas a service life of 5 years. It has a scrap value of$165,000.
Assume that the discount rate is 6% and that electricity is paidat the end of each year. Calculate the net present value for eachoption and recommend the option that Over the River Bridge Companyshould take based on the net present value.

Answer & Explanation Solved by verified expert

4.0 Ratings (405 Votes)

Let us first calculate NPV of each option Note I am showing OUTFLOW as positive item Lowest NPV would be better in this case Option 1 Year Cash Flow PV Factor Present Value 0 See Answer

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In: AccountingOver the River Bridge Company needs to replace its CNC Machiningline. They have 3 different...Over the River Bridge Company needs to replace its CNC Machiningline. They have 3 different options for the replacement.Option 1:Replace the worn-out equipment with the same equipment. Thequoted price of this equipment is $16,500,000 due in full upondelivery. This equipment uses $185,000 of electricity a year. Ithas a service life of 5 years. It has a scrap value of$375,000.Option 2:Replace the worn-out equipment with Eco-CNC equipment. Thequoted price of this equipment is $17,800,000 payable in 5 equalinstallments of 3,560,000 starting at delivery. This equipment uses$96,000 of electricity a year. It has a service life of 5 years.Ithas a scrap value of $475,000.Option 3:Replace the worn-out equipment with Bargain Shack equipment. Thequoted price of this equipment is $9,000,000 where half is payableupon delivery and the remainder is payable in 1 year afterdelivery. This equipment uses $135,000 of electricity a year. Ithas a service life of 5 years. It has a scrap value of$165,000. Assume that the discount rate is 6% and that electricity is paidat the end of each year. Calculate the net present value for eachoption and recommend the option that Over the River Bridge Companyshould take based on the net present value.