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.
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?