Thank you Taterhead Construction Company is considering purchasing a new machine

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Thank you

Taterhead Construction Company is considering purchasing a new machine to peel their potatoes. Based on market and internal generated data they have narrowed the alternatives that they would consider down to three major suppliers. Realizing that they might be able to negotiate further modification, they chose to do the evaluations based on the following "best guesses. Items Company C Company A Company B Installed Costs $17,500 $22,500 $27,500 OM & R 1500 1,800 600 14,500 10,500 8,500 Annual Benefit Salvage Value 4,700 5,830 3,250 Life 4 years 4 years 4 years MARR (Before 25% 25 Taxes A) Use IRR analysis to determine which alternative if any should be selected. Now this time tell me why as well as saying this one. B) If one allowed the interest rate to vary over a range from 0 to 100 in increments of h over what ranges would Company C's product be preferred to Company B's? C) How much would Company A have to lower its initial offering price to make it as desirable as Company C's offer?

Explanation / Answer

for company A,

cash flow for year 0 = -17,500

annual cash flow = 8500-1800 = 6700

time = 4 years

salvage value = 3250

17500 = 6700*PVIFA(IRR,4)+3240/(1+IRR)^4

IRR = 23.95%

fr cmpany B,

cash flow for year 0 = -27,500

annual cash flow = 14500-600 = 13900

time = 4 years

salvage value = 5830

27500 = 13900*PVIFA(IRR,4)+5830/(1+IRR)^4

IRR = 39.35%

for company C

cash flow for year 0 = -22,500

annual cash flow = 10500-1500 = 9000

time = 4 years

salvage value = 4700

22500 = 9000*PVIFA(IRR,4)+4700/(1+IRR)^4

IRR = 26.58%

as MARR = 25%

for company B,

IRR >>MARR

39.35%>>25%

i.e for zero NPV its rate of return is 39.35%

company B is best option

Part B),

to calculate part B

first calculate NPV of company B @MARR = 25%

NPV of company B = -27500+13900*PVIFA(25,4)+5830/(1+.25)^4 = $7714.20

NPV of comany C = -22500+9000*PVIFA(25,4)+4700/(1+.25)^4 = $679.52

now if we will vary the MARR, range at which NPV C will be preferred

difference of cash flow between company B and C

difference of initial investment = 27500-22500 = $5000

difference in cash flow = 13900-9000 = 4900

difference in salvage value = 5830-4700 = 1130

5000 = 4900*pvifa(IRR,4)+1130/(1+irr)^4

IRR = 92.37%

at MARR = 92.37% to 100%

company C will be preferred,

for example

at MARR = 95%

NPV for company B = -13477

NPV for company C = -13356

NPV company C>NPV for company B

part C)

to make it as desirable as company C for company A

for company A, IRR should be 26.58%

PV of all future cash flow for comapany A at this rate = 6700*PVIFA(26.58,4)+3250/(1.2658)^4 = 6700*2.2967+1265.97

PV of all future cash flow for comapany A at this rate = $16653.86

company A should lower its price to = $16653.86

amount of lowering = 17500-16653.86 = $846.14 (approx)

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