Question

A company needs to purchase a new machine to maintain its level of production. The company_is__considering three different machines. The costs savings and service life related to each machine are listed in the table below. 1 500 He first year and increasing by $ 750 | Machine A Machine B Machine C First Cost $ 26,000 $30,000 $ 28,000 Annual savings $12,000 $12, 500 $12,750 Hamanl maintenanvel $2,750 $2,500 every year thereafter $1,750 Salvage value $12,500 $6,000 $1,500 service life | 3 years 6 years 3 years Given a MARR of 12% and considering the rate of return method : in this problem p Is "Do nothing" an alternative to consider a) Yes b) No Not Surenned with formation provided

Answer 1

Machine A Years Particulars L 1 2 3 Cash Outflows: Initial Payment Annual Maintenance (26,000.00) (2,750.00) (2,750.00) (2,750.00) Cash Inflows Annual Savings Salvage Value 12,000.00 12,000.00 12,000.00 12,500.00 Net Cash Inflow/ (outflow) A PV factor (1/(1+rate) “year)) B= Present Value (AxB) = NPV of the project = (26,000.00) 1 1.000 -26000.00 $ 5,114.19 9,250.00 1/1.12 0.893 8258.93 9,250.00 1/1.12^2 0.797 7374.04 21.750.00 1/1.1243 0.712 15481.22 Profitability Index = PV of Future Cash flows / Initial Investment $ 31,114.19 $ 26,000.00 D 1.20 Machine B Years Particulars 0 1 2 3 4 5 6 Cash Outflows: Initial Payment Annual Maintenance (30,000.00) (2,750.00) (3,500.00) (4,250.00) (5,000.00) (5,750.00) (6,500.00) Cash Inflows Annual Savings Salvage Value 12,500.00 12,500.00 12,500.00 12,500.00 12,500.00 12,500.00 6,000.00 Net Cash Inflow/ (outflow) A (30,000.00) PV factor (1/(1+rate)^year)) 1 B= 1.000 Present Value (AxB) = -30000.00 NPV of the project = $ 6,428.38 9,750.00 9,000.00 1/1.12 1/1.12^2 0.893 0.797 8705.36 | 7174.74 8,250.00 7,500.00 1/1.1243 1/1.1244 0.712 0.636 5872.19 | 4766.39 6,750.00 12,000.00 1/1.1245 1/1.1246 0.567 0.507 3830.136079.57 | Profitability Index = PV of Future Cash flows / Initial Investment $ 36,428.38 $30,000.00 1.21

Machine C Years Particulars 0 1 2 3 Cash Outflows: Initial Payment Annual Maintenance (28,000.00) (1,750.00) (1,750.00) (1,750.00) Cash Inflows Annual Savings Salvage Value 12,750.00 12,750.00 12,750.00 11,500.00 Net Cash Inflow/ (outflow) A (28,000.00) | 11,000.00 11,000.00 PV factor (1/(1+rate) “year)) 1 1 /1.12 1/1.1242 B= 1.000 0.893 0.797 Present Value (AXB) = -28000.00 9821.431 8769.13 NPV of the project = $6,605.62 22,500.00 1/1.1243 0.712 16015.06 | Profitability Index = PV of Future Cash flows / Initial Investment $ 34,605.62 $ 28,000.00 1.24 As all the three machines are having positive NPVs all the machines are financially feasible Machine C is having the higher NPV and higher Profitabily Index. Thus, Machine C should be chosen therefore "Do Nothing" is not an alternative to this problem. Option b) No - should be choosen

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