Assignment
Question 1
MedCo is a large manufacturing company, currently using a large printing press in its operations, and is considering two replacements: the PDX341 and PDW581. The PDX341 costs £500,000 and has annual maintenance costs of £10,000 for the first 5 years and £15,000 for the following 5 years. After 10 years, MedCo would scrap the PDX341 (salvage value is zero). In contrast, PDW581 costs £50,000 and requires maintenance of £30,000 a year for its 10-year life. The salvage value of the PDW581 would be zero in 10 years. MedCo must replace its current printing press because it has stopped functioning. Assume that MedCo has a 10% cost of capital and that all cash flows are after tax.
Required: Use the NPV approach to calculate which replacement press is the more appropriate.
Question 2
Read the Peavler (2014) article and answer the required questions.
Peavler, R. (2014) Pros and cons of the discounted payback period [Online]. (Accessed 26 March 2015).
ABC Computer, a computer manufacturing company, is considering opening three retail stores in Manchester, UK. To do this, ABC requires a £600,000 initial investment and expects to make £120,000 per year in the first 4 years and £240,000 every year for the next 3 years.
Required:
• What is the payback period?
• One of the disadvantages of the payback method is that the time value of money is not considered when you calculate payback period. If the discount rate is 8%, what is the discounted payback period?