Question

Perform an incremental analysis of the two finalist projects using the data provided below.

The company uses a MARR of 10% and depreciates its assets using 7-year MACRS. The company’s effective income tax rate is 25%.

Project 1: Milling machines Equipment cost: Two (2) machines that each cost $380,000 including trade-in allowance and sales tax. The total cost of the freight and handling is expected to be $25,000. The total cost to install the machines is $30,000. Total testing and startup costs to place the machines into service are estimated to be $32,000. Useful life: 8 years. It is estimated that the machines can be sold for a total of $105,000 at the end of the project.

Each machine requires one operator at a time at a rate of $32.00 per hour. The plant operates 4080 hours per year. Total maintenance labor costs are estimated to be 20% of operating hours at $22.00 per hour. Total annual direct materials are estimated at $290,000. Manufacturing overhead exclusive of depreciation is expected to be an additional $270,000 per year.

Revenues are expected to be $1,025,000 each year as a result of this project. The project would run for 8 years.

Project 2: Painting Line Equipment cost: $315,000 including trade-in allowance and sales tax. The total cost for freight and handling is expected to be $15,000. The total cost to install the line is $35,000. Testing and startup costs to place the line in service are estimated to be $24,000. Useful life: 8 years. It is estimated that the line can be sold for a total of $70,000 at the end of the project.

The line requires one operator at a time a rate of $30.00 per hour and one helper at a time at a rate of $19.75 per hour. The plant operates 4080 hours per year. Total annual direct materials are estimated at $150,000. Maintenance labor costs are estimated to be 20% of operating hours at $19.00 per hour. Manufacturing overhead exclusive of depreciation is expected to be $220,000 per year.

Revenues are expected to be $635,000 for the first year as a result of the project and are expected to increase by 2% each year throughout the project. The project would run for 8 years.

Answer 1

I have calculated the Present value of Cash Flow from both the project.

Project 2 has positive NPV and Project 1 has negative NPV. Please see the attached table for detail. As answer is long so I has to put image of of answer.