Question

ABC company is considering two different injection molding machines for the new production line. They have to choose one of these two models. The cost data for the two alternatives are given in the table below. MARR is 10%. X21-T Model Z24-T

Initial cost $440K $580K

Annual operating cost 75K 35K

Benefits /Year 150K 130K

Salvage value 35K 30K

Life 12 Years for both

a) Calculate the rate of return for each alternative. What is your conclusion for part a?

b) Using the internal rate of return (IRR) analysis, which machine should be selected? Show all the required steps. Round the answer to 4 decimal place (0.1234 0r 12.34%). Use interpolation to find i values. Excel solution is NOT accepted.

*PLEASE SHOW ALL STEPS AND FORMULAS USED .

Answer 1

Machine 1
Year	Initial Cost	Operating Cost	Benefits	Salavge	Net Cash flow	PVF@10%	PV
0	-440				-440	1	-440
1		-75	150		75	0.909	68.18182
2		-75	150		75	0.826	61.98347
3		-75	150		75	0.751	56.34861
4		-75	150		75	0.683	51.22601
5		-75	150		75	0.621	46.5691
6		-75	150		75	0.564	42.33554
7		-75	150		75	0.513	38.48686
8		-75	150		75	0.467	34.98805
9		-75	150		75	0.424	31.80732
10		-75	150		75	0.386	28.91575
11		-75	150		75	0.350	26.28704
12		-75	150	35	110	0.319	35.04939
					NPV		82.17897
Rate of Return		(522.178-440)/440		18.68%
Machine 2
Year	Initial Cost	Operating Cost	Benefits	Salavge	Net Cash flow	PVF@10%	PV
0	-580				-580	1	-580
1		-35	130		95	0.909	86.36364
2		-35	130		95	0.826	78.5124
3		-35	130		95	0.751	71.37491
4		-35	130		95	0.683	64.88628
5		-35	130		95	0.621	58.98753
6		-35	130		95	0.564	53.62502
7		-35	130		95	0.513	48.75002
8		-35	130		95	0.467	44.3182
9		-35	130		95	0.424	40.28927
10		-35	130		95	0.386	36.62661
11		-35	130		95	0.350	33.29692
12		-35	130	30	125	0.319	39.82885
					NPV		76.85965
Rate of Return		(656.859-580)/580		13.25%
Proposal 1 is better

Answer(b)

Machine 1
Year	Initial Cost	Operating Cost	Benefits	Salavge	Net Cash flow	PVF@10%	PV	PVF@15%	PV
0	-440				-440	1	-440	1	-440
1		-75	150		75	0.909	68.1818	0.869565	65.21739
2		-75	150		75	0.826	61.9835	0.756144	56.71078
3		-75	150		75	0.751	56.3486	0.657516	49.31372
4		-75	150		75	0.683	51.2260	0.571753	42.88149
5		-75	150		75	0.621	46.5691	0.497177	37.28826
6		-75	150		75	0.564	42.3355	0.432328	32.42457
7		-75	150		75	0.513	38.4869	0.375937	28.19528
8		-75	150		75	0.467	34.9881	0.326902	24.51763
9		-75	150		75	0.424	31.8073	0.284262	21.31968
10		-75	150		75	0.386	28.9157	0.247185	18.53885
11		-75	150		75	0.350	26.2870	0.214943	16.12074
12		-75	150	35	110	0.319	35.0494	0.186907	20.55979
					NPV		82.1790		-26.9118
	IRR	10+ (82.179/109.09)*5				13.76657
Machine 2
Year	Initial Cost	Operating Cost	Benefits	Salavge	Net Cash flow	PVF@10%	PV	PVF@15%	PV
0	-580				-580	1	-580	1	-580
1		-35	130		95	0.909	86.3636	0.869565	82.6087
2		-35	130		95	0.826	78.5124	0.756144	71.83365
3		-35	130		95	0.751	71.3749	0.657516	62.46404
4		-35	130		95	0.683	64.8863	0.571753	54.31656
5		-35	130		95	0.621	58.9875	0.497177	47.23179
6		-35	130		95	0.564	53.6250	0.432328	41.07112
7		-35	130		95	0.513	48.7500	0.375937	35.71402
8		-35	130		95	0.467	44.3182	0.326902	31.05567
9		-35	130		95	0.424	40.2893	0.284262	27.00493
10		-35	130		95	0.386	36.6266	0.247185	23.48255
11		-35	130		95	0.350	33.2969	0.214943	20.41961
12		-35	130	30	125	0.319	39.8289	0.186907	23.36339
					NPV		76.8596		-59.434
	IRR	10+ (76.8596/136.29)*5				12.81971