Part 2 - Manufacturing Financing Almond Roca decides to go with the new nut mixture, and needs to make some decisions regarding the investment in...

Part 2 - Manufacturing Financing

Almond Roca decides to go with the new nut mixture, and needs to make some decisions regarding the investment in land and capital for their new venture.

New manufacturing equipment:

The Almond Roca procurement team seeks out possibilities for investing in new nut sorting equipment. They find one firm that will lease the equipment, for a $2500 initial payment, with 48 monthly payments of $1650 amount. They find a second firm that will lease the equipment for $14,000 down, and $1375 for 48 months. Assume that the discount rate is 1% per month and compounded monthly.

a)         Calculate the total payments for the first option ignoring the time value of money.

b)         Calculate the total payments for the second option ignoring the time value of money.

c)          Which option do you choose based on (a) and (b)?

d)         Calculate the net present value for the first option.

e)         Calculate the net present value for the second option.

f)           Which option do you choose based on (d) and (e)?

If they chose to purchase the machine outright, it would cost $65,000 dollars. Assume they can borrow the capital with $14,000 down and 12% annual interest compounded monthly with a repayment schedule of 48 months. Also assume the machine depreciates according to a double-declining balance schedule and is fully depreciated at 12 years. Suppose this machine will save the company $3000 per month in labor and utilities.

g)         Calculate the net present value for the three options accounting for the monthly savings.

h)         Should the firm purchase the machine outright? Discuss the impact on economic profit given the tax rate is 20% and the cost of capital is 12%.