Hi guys, Its assignment 3 (final one) of my business accounting subject for my MBA, and I am hopeless at mathematical things (so guess who's having a challenging time with this core subject!). Not to mention Im doing it by correspondence so Ive been thrown a text book and three assignments and not much else. Anyway, wouldn't you believe it, the last question on my last assignment has got me completely stumped!! If I get this assignment nailed Im in a good position for a HD so Im just hoping someone out there in the zed world can help me out. Here's the question:Sebright Company is contemplating acquiring one of the following machines: machine X Machine Y Initial Investment $180,000 $225,000 Additional revenue $81,250 $150,000 Cash expenses $28,500 $72,500 Terminal salvage value 0 0 Estimate useful life 5 years 5 years Minimum desired rate 14% 14% of returnAssume straight-line depreciation and ignore income taxes.Required: Calculate the net present value for both machines, and choose the best alternative.The course convenor wants us to ignore depreciation for this one - to keep it simple. :| Can anyone help??

depreciation rates are irrelevant as the usegul life and the salvage value are the same.so basically your looking at an initial investment plus 5 times the cash expenses (assuminin they are per annum) = total investment.5 times the additional revenue equals the total revenue.total revenue minus the total cost = profitprofit divided by total cost = ROI this would suggest that Machine 2 is better as its ROI is 27.6% as opposed to machine 1 which is 25%Now if your ignoring depreciation, the net present value is the purchase price plus cash expenses. But the net present value wont tell you which one is better, only ROI.Thants my view anyway, its been a while since ive done pure accounting per se, but thats how i remember it. That seems pretty simple for MBA, which makes me think im probably wrong.

Its simple..>> The answer is, you buy Machine Y...do some nifty accounting you learnt at uni and claim that you actually bought Machine X, writing off the difference as "extended warranty" or something. Then you take the $45k difference, and spend it on mods for your Z. Then you have a really really nice Z. Your bosses daughter sees your car, and bling! what women can resist, and soon your engaged. Then you let dad retire, take over the company, then its all profit. Something like that anyways.

Lou getting engaged To the bosses daughter, now that will get the tongues wagging. Seriously its been a while since i used this but i have a text book that gives a good explanation of the workings of net present values. your welcome to it if you want. cheers Ron=)

Love the idea however... My $45k worth of modifications will hopefully catch the eye of the bosses son instead. ....and your response is probably closer to how an MBA would handle the situation, rather than doing business in a legitimate way. CheersLouise

how's this Machine X: -180,000 + (81,250 - 28,500) * 5 = 83,750 Rate of Return = 83,750 / 180,000 = 46.5%Machine Y: -225,000 + (150,000 - 72,500) * 5 = 162,500 Rate of Return = 162,500/225,000 = 72.2%Machine Y has the highest ROI and the longer they are used the better machine Y's ROI.

Im getting different ROIs..... These are my calcs according to your theory but Im getting slightly different ROIs. Are these just rounding errors? I see where I was going worng - I must have been having a blonde moment last night, because I forgot to calculate the additional revenue & cash expenses by 5 years. oops.Machine X:Total Investment = Initial investment + (5 * Cash expenses) = $180,000 + (5 * $28,500) = $322,500Total Revenue = 5 * additional revenue = 5 * $81,250 = $406,250Profit = total revenue - total cost = $406,250 - $322,500 = $83,750Return on Investment = profit / total cost = $83,750 / $322,500 = 26% Machine Y:Total Investment = Initial investment + (5 * Cash expenses) = $225,000 + (5 * $72,500) = $587,500Total Revenue = 5 * additional revenue = 5 * $150,000 = $750,000Profit = total revenue - total cost = $750,000 - $587,500 = $162,500Return on Investment = profit / total cost = $162,500 / $587,500 = 27.7%

aggghhhh!!!!!!!!!!!!!!! Now Im getting two conflicting results! D'oh! Im not so sure on your calcs Chewy. You are calculating the initial investment by 5, according to your figures. The initial investment is a once off payment, and is not repeated each year - the cash expenses figure gets calculated anually over the five year period instead.Correct me if Im wrong.Lou

i dont think that is right. Its plain to see that the investment on machine X is 180,000 plus 28,000 odd per month in cash expenses. Cash expenses is an investment accrued in the first year in this example over the 5 year term. Your figuers the were right the first time lou, i didnt roubnd the 25.9 to to 26. sorry.With ROI it is importend to distinguish between return=revenue and return=profit over the cost of the investment. Use Return=profit to establish ROI, Id say your pretty right on this one, but make sure it makes sense to you too. After doing accounting as Uni, my CA boss was a real world accountant, so alot of dodgy stuff went on so my memory is shot. But id say your right on lou.

thanks The text book Im using described ROI as: "A measure of income or profit divided by the investment required to obtain that income or profit."So you are right to go with profit.As for this being a fairly simple question for MBA standards - This is a core subject on business accoutning & finance. It is basically designed to give wannabe managers a fairly general grasp of business accounting - not really expecting the student to go to be a full-on accountant. (That will be for my Underlings, one day. ) It is just so a manager can follow what an accountant is telling them. The subject looks more at the theory behind business accounting & how it all effects the management of a business. But the assignments throw in a few calculations just so we can understand how figures are formulated. Luckily for me Im not majoring in this mathematical nightmare. Thanks for your help guys!Louise.

I feel your pain Lou!!.. ..I also hate maths, but unfortunately Im in a mechanical engineering degree...lots of nasty, nasty maths. I suggest some alchohol to rid your memory of that nightmare once your finished=)

We had it wrong. I reread the question: I was asked to calculate the Net Present Value of the machines not the return on investment. So I came up with the following (with a bit of help with the lovely accountant at work... ) Machine X: Cash Value Inflow = (cash inflow * table value) - (expenses * table value) = ($81,250 * 3.4331) - ($28,500 * 3.4331) = $278,939.375 - $97,843.35 = $181,096.03 Net Present Value = Current Value inflow - initial investment = $181,096.03 - $180,000 = $1,096.03 Machine Y: Cash Value Inflow = (cash inflow * table value) - (expenses * table value) = ($150,000 * 3.4331) - ($72,5000 * 3.4331) = $514,965 - $248,899.75 = $266,065.25 Net Present Value = Current Value inflow - initial investment = $266,065.25 - $225,000 = $41,065.25 Table values are based on: PVa=1/i(1 - 1/(1+i)n) at 14% for 5 years. Therefore, machine Y is the best alternative since the net present value is higher than machine X.

Thats accounting for ya. ROI is alot simpler and gave the same result.But you had a question and we followed the rong method. sorry mate. Heres something to keep in mind for the real world. Odds on, most companies would opt for machine X. Percentage wise, machine X gives almost the same return on investment, yet initial cost is almost half. You could almost get two machine X for the price of one machine Y. Having 2 machines is better as it improves liquidity (ie you can maintain production yet sell one) and most machines are multifunctional giving you improved versatility.If you only buy one machine, then cash flow is up. Maybe the second machine is too productive, if its producing product components, then the second machine may be so efficient that it produces above the production lines capabilities and thus becomes inefficient.One important thing that my ex boss accountant focused on was keeping it real. (before ali G said it).