ABC company is considering two different injection molding machines for the new
ID: 2656938 • Letter: A
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 .
Explanation / Answer
Answer(b)
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