Reference no: EM132468660

Question 1: Describe the circumstances of the following case

Question 2: How to recommend a course of action.

Question 3: Explain your approach to the problem,

Question 4: How to perform relevant calculations and analysis, and

Question 5: kindly assist me to formulate a recommendation.

Case :

A manufacturing company is evaluating two options for new equipment to introduce a new product to its suite of goods. The details for each option are provided below:

Option 1

• $65,000 for equipment with useful life of 7 years and no salvage value.
• Maintenance costs are expected to be $2,700 per year and increase by 3% in Year 6 and remain at that rate.
• Materials in Year 1 are estimated to be $15,000 but remain constant at $10,000 per year for the remaining years.
• Labor is estimated to start at $70,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

Year 1           0

Year 2          75,000

Year 3         100,000

Year 4         125,000

Year 5         150,000

Year 6         150,000

Year 7         150,000

Option 2

• $85,000 for equipment with useful life of 7 years and a $13,000 salvage value
• Maintenance costs are expected to be $3,500 per year and increase by 3% in Year 6 and remain at that rate.
• Materials in Year 1 are estimated to be $20,000 but remain constant at $15,000 per year for the remaining years.
• Labor is estimated to start at $60,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

Year 1 -

Year 2        80,000

Year 3        95,000

Year 4       130,000

Year 5       140,000

Year 6      150,000

Year 7     160,000

• The company's required rate of return is 8%.

1. Management has turned to its finance and accounting department to perform analyses and make a recommendation on which option to choose. They have requested that the four main capital budgeting calculations be done: NPV, IRR, Payback Period, and ARR for each option.

Question 1: Compute all required amounts and

Question 2: Explain how the computations were performed.

Question 3: Evaluate the results for each option and

Question 4:  Explain what the results mean.

Question 5: kindly assist me to recommend which option the company should pursue, based on the analysis.