(Calculating EAC) The Templeton Manufacturing and Distribution Company of Tacoma, Washington, is contemplating the purchase of a new conveyor belt system for one of its regional distribution facilities. Both the alternatives it is considering will accomplish the same task, but the Eclipse model will cost substantially more than the Sabre model and will not have to be replaced for 10 years, whereas the Sabre model will need to be replaced in just 5 years. The costs of purchasing the two systems and the costs of operating them annually over their expected lives are as follows: Year Eclipse Sabre (1,400,000) (800,000) 1 (25,000) (50,000) (30,000) (50,000) 3 (30,000) (60,000) (30,000) (60,000) 5 (40,000) (80,000) 6. (40,000) 7 (40,000) (40,000) (40,000) 10 (40,000) a. Templeton typically evaluates investments in plant improvements using a 12 per- cent required rate of return. What are the NPVS for the two systems? b. Calculate the EACS for the two systems. c. Based on your analysis of the two systems using both their NPVS and their EACS, which system do you recommend that the company pick? Why?
(Calculating EAC) The Templeton Manufacturing and Distribution Company of Tacoma, Washington, is contemplating the purchase of a new conveyor belt system for one of its regional distribution facilities. Both the alternatives it is considering will accomplish the same task, but the Eclipse model will cost substantially more than the Sabre model and will not have to be replaced for 10 years, whereas the Sabre model will need to be replaced in just 5 years. The costs of purchasing the two systems and the costs of operating them annually over their expected lives are as follows: Year Eclipse Sabre (1,400,000) (800,000) 1 (25,000) (50,000) (30,000) (50,000) 3 (30,000) (60,000) (30,000) (60,000) 5 (40,000) (80,000) 6. (40,000) 7 (40,000) (40,000) (40,000) 10 (40,000) a. Templeton typically evaluates investments in plant improvements using a 12 per- cent required rate of return. What are the NPVS for the two systems? b. Calculate the EACS for the two systems. c. Based on your analysis of the two systems using both their NPVS and their EACS, which system do you recommend that the company pick? Why?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 20P: The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting,...
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Transcribed Image Text:11-5. (Calculating EAC) The Templeton Manufacturing and Distribution Company of
Tacoma, Washington, is contemplating the purchase of a new conveyor belt system
for one of its regional distribution facilities. Both the alternatives it is considering
will accomplish the same task, but the Eclipse model will cost substantially more
than the Sabre model and will not have to be replaced for 10 years, whereas the
Sabre model will need to be replaced in just 5 years. The costs of purchasing the
two systems and the costs of operating them annually over their expected lives are
as follows:
Year
Eclipse
Sabre
(1,400,000)
(800,000)
1
(25,000)
(50,000)
(30,000)
(50,000)
3
(30,000)
(60,000)
4
(30,000)
(60,000)
5
(40,000)
(80,000)
(40,000)
7
(40,000)
(40,000)
(40,000)
10
(40,000)
a. Templeton typically evaluates investments in plant improvements using a 12 per-
cent required rate of return. What are the NPVS for the two systems?
b. Calculate the EACS for the two systems.
c. Based on your analysis of the two systems using both their NPVS and their EACS,
which system do you recommend that the company pick? Why?
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