(Present Value Tables Are Required

question 90

Multiple Choice

(Present value tables are required. ) Figgey,a plastics processor,is considering the purchase of a high-speed extruder as one option.The new extruder would cost $52,000 and would have a residual value of $5,000 at the end of its 8-year life.The annual operating expenses of the new extruder would be $8,000.The other option that Figgey has is to rebuild its existing extruder.The rebuilding would require an investment of $30,000 and would extend the life of the existing extruder by 8 years.The existing extruder has annual operating costs of $11,000 per year and does not have a residual value.Figgey discount rate is 14%.Using net present value analysis,which option is the better option and by how much?

• A)Better by $8,083 to rebuild existing extruder
• B)Better by $8,083 to purchase new extruder
• C)Better by $6,328 to rebuild existing extruder
• D)Better by $6,328 to purchase new extruder

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Definitions:

Interest Rate Risk

The potential for loss due to a change in interest rates affecting investment values or borrowing costs.

Time To Maturity

The remaining life of a debt instrument, at the end of which the principal is usually repaid.

Coupon Rate

The annual interest rate paid by a bond relative to its face value, expressed as a percentage.

Put Provision

An option clause in a bond or preferred stock allowing the holder to sell back the security to the issuer at a predetermined price before maturity.