In a certain manufacturing company, decisions regarding approval of proposals fo
ID: 1184525 • Letter: I
Question
In a certain manufacturing company, decisions regarding approval of proposals for plant investment are based on the requirement of a 25% minimum attractive rate of return before income taxes. The mechanization of a certain costly hand operation has been proposed. Machines from six different manufacturers are under consideration. The estimated investment for each proposal and the estimated reduction in annual disbursements are as follows: Assume that each machine will have an 8-year life with zero terminal salvage value. Which one if any, of these six mutually exclusive investments should be made? Show the calculations on which you base your recommendation.Explanation / Answer
Machine Initial Investment Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Year 5 Cash Flow Year 6 Cash Flow Year 7 Cash Flow Year 8 NPV @ 25 % Onodonga 54000 20800 20800 20800 20800 20800 20800 20800 20800 15241.36 Oneida 60500 21600 21600 21600 21600 21600 21600 21600 21600 11404.49 Cayuga 72000 26500 26500 26500 26500 26500 26500 26500 26500 16216.15 Tuscora 77400 27800 27800 27800 27800 27800 27800 27800 27800 15143.74 Seneca 91800 32700 32700 32700 32700 32700 32700 32700 32700 17055.40 Mohawk 108000 36800 36800 36800 36800 36800 36800 36800 36800 14503.94 Since Seneca has the highest NPV, so it is recommended