Pucker Distributors handles the warehousing of perishable foods and is considering replacing one of it primary...

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Pucker Distributors handles the warehousing of perishable foodsand is considering replacing one of it primary cold storage units.The company had previously hired a consultant at a cost of $25,000to study the feasibility of replacing its cold storage unit.
One vendor has offered to sell Pucker a cold storage unit for$250,000 with an expected life of 10 years. The unit is projectedto reduce electricity costs over the current unit by $50,000 peryear. However, it requires a $20,000 refurbishing every two years,beginning two years after purchase. The value of the unit at theend of 10 years is $5,000.
Another vendor has offered to sell Pucker a cold storage unitwith similar capabilities for $300,000 and also with an expectedlife of 10 years. It will produce the same savings in electricitycosts, but requires refurbishing every five years at a cost of$40,000. The value of the unit at the end of 10 years is$10,000.
Pucker's cost of capital is 8.5%.
Also, please answer the following questions:
Use a Net Present Value (NPV) analysis to determine which coldstorage unit Pucker should select.
What does the NPV tell you about the project'sacceptability?
What is the payback and the internal rate of return for eachoption?
From what little you know about the company Pucker, do you feelthat the 8.5% cost of capital is appropriate for this project?
What potential risks could you foresee related to thisreplacement project and how could you mitigate those risks?

Answer & Explanation Solved by verified expert

4.3 Ratings (565 Votes)

Since company has previously hired a consultant it is a Sunk Cost and it will not be taken into consideration Also even if we do it is common cost so it is expended in any scenario Comparison of NPV of 2 vendors is as below Note Assuming that either units See Answer

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Pucker Distributors handles the warehousing of perishable foodsand is considering replacing one of it primary cold storage units.The company had previously hired a consultant at a cost of $25,000to study the feasibility of replacing its cold storage unit.One vendor has offered to sell Pucker a cold storage unit for$250,000 with an expected life of 10 years. The unit is projectedto reduce electricity costs over the current unit by $50,000 peryear. However, it requires a $20,000 refurbishing every two years,beginning two years after purchase. The value of the unit at theend of 10 years is $5,000.Another vendor has offered to sell Pucker a cold storage unitwith similar capabilities for $300,000 and also with an expectedlife of 10 years. It will produce the same savings in electricitycosts, but requires refurbishing every five years at a cost of$40,000. The value of the unit at the end of 10 years is$10,000.Pucker's cost of capital is 8.5%.Also, please answer the following questions:Use a Net Present Value (NPV) analysis to determine which coldstorage unit Pucker should select.What does the NPV tell you about the project'sacceptability?What is the payback and the internal rate of return for eachoption?From what little you know about the company Pucker, do you feelthat the 8.5% cost of capital is appropriate for this project?What potential risks could you foresee related to thisreplacement project and how could you mitigate those risks?