e.The new copier is likely to yield better quality copies. The old copier may break down more often and is likely to be more difficult to maintain. The problem already states that the additional risk of losing customers -- because the old copies lacks the features the new copier offers -- has already been taken into account in the estimates. Still, these issues are hard to quantify and require managerial judgment.Balakrishnan, Sivaramakrishnan, & Sprinkle – 2eFOR INSTRUCTOR USE ONLY11-15

11.53Total investment involved in purchasing the advanced milling machine and making it op-erational = $2,500,000 + $500,000 = $3,000,000. Costs that are incurred to make the milling machine operational should be included in the investment cost.The variable material cost per unit using the milling machine = $8 × (1 - 0.20) = $6.40The variable labor cost per unit using the milling machine = $12 × (1 – 0.40) = $7.20.Annual saving in variable costs per unit = $8 + $12 - $6.40 - $7.20 = $6.40.Total after-tax annual cost savings = 200,000 units × $6.40 per unit = $1,280,000 × (1 - 0.35) = $832,000.Annual depreciation for the milling machine = $3,000,000/5 = $600,000Tax saving from depreciation = $600,000 × 0.35 = $210,000Thus, total net annual cash inflow per year for the next five years if Jayant purchases the milling machine = $832,000 + $210,000 = $1,042,000.Present value of net annual cash inflow of $1,042,000 for the next years discounted at 14% = $1,042,000 × Annuity factor (5 Years, 14%) from Table 3 in Appendix B= $1,042,000 × 3.433 = $3,577,186.Therefore, net present value of the milling machine purchase = $3,577,186 – 3,000,000 = $577,186. 11.54a.The following table presents annual net after-tax cash flow for ten-year life of the pro-posed product line.YearSalesVariablecostFixedcostAfter-taxoperatingcash flowaDepreciationtax shieldbTotal annualnet cash flowYear 1$4,000,000 $1,600,000 $750,000 $1,155,000 $240,000 $1,395,000 Year 2$4,400,000 $1,760,000 $750,000 $1,323,000 $240,000 $1,563,000 Year 3$4,840,000 $1,936,000 $750,000 $1,507,800 $240,000 $1,747,800 Year 4$5,324,000 $2,129,600 $750,000 $1,711,080 $240,000 $1,951,080 Year 5$5,324,000 $2,129,600 $750,000 $1,711,080 $240,000 $1,951,080 Year 6$5,324,000 $2,129,600 $750,000 $1,711,080 $240,000 $1,951,080 Year 7$5,324,000 $2,129,600 $750,000 $1,711,080 $240,000 $1,951,080 Year 8$3,993,000 $1,597,200 $750,000 $1,152,060 $240,000 $1,392,060 Year 9$2,994,750 $1,197,900 $750,000 $732,795 $240,000 $972,795 Year 10$2,246,063 $898,425 $750,000 $418,346 $240,000 $658,346 Balakrishnan, Sivaramakrishnan, & Sprinkle – 2eFOR INSTRUCTOR USE ONLY11-16

a (Sales – variable cost – fixed cost) × (1-0.30). Sales in year 1 are $4,000,000 = 200,000 * $20 and $4,400,000 = 200,000 * 1.1 * $20 in year 2.b Depreciation × 0.30, where depreciation = $8,000,000/10 = $800,000. The tax shieldis therefore $240,000 = 800,000 * 0.3.b.The following table presents the net present value calculations.Initial investment = $8,000,000, Life 10 years, Discount rate 12 percentYearAfter-taxNet CashFlow PresentvaluefactorPresentValueCumulativePresent ValueYear 0Initial investment ($8,000,000) Year 1$1,395,000 0.893$1,245,735 $1,245,735 Year 2$1,563,000 0.797$1,245,711 $2,491,446 Year 3$1,747,800 0.712$1,244,434 $3,735,880 Year 4$1,951,080 0.636$1,240,887 $4,976,766 Year 5$1,951,080 0.567$1,106,262 $6,083,029 Year 6$1,951,080 0.507$989,198 $7,072,226 Year 7$1,951,080 0.452$881,888 $7,954,115 Year 8$1,392,060 0.404$562,392 $8,516,507 Year 9$972,795 0.361$351,179 $8,867,686 Year 10$658,346 0.322$211,987 $9,079,673 Net present value ($9,079,673 - $8,000,000)$1,079,673 Note: The above answer uses the PV factor to 3 decimal places only.c.The internal rate of return equates the present value of cash flows over the next ten years to the initial investment of $8,000,000. Using Excel, we can determine this rate to be 15.35% (rounded). Use the IRR formula after inputting the net undiscounted cash flows in cells A1-A11, and entering the initial investment with a negative sign.