Modern Medical Mechanics (M 3 ) has to replace a production machine used to prod

Question

Modern Medical Mechanics (M3) has to replace a production machine used to produce a single part. They need an evalaution of two alternative machine models. The forecasted demand for the part is shown below. The choice of machine will not affect this demand of the part nor the M3 revenue. Both of the new machines will last four years and then be replaced with the salvage values at the end of 4 years that is listed below.   Depreciation will be 5-year MACRS The two machines have the prices, production cost per part, and salvage value in year 4 as shown below. All setup of the new machines is part of the purchase price. Using a 4-year time horizon, document and make a recommendation of which machine should be adopted from a financial perspective. Assume that there will not be any change in Revenue, S.G. & A or working capital resulting from this decision. Platinum Model Titanium Model Purchase price $188,000 $223,000 Salvage value $50,000 $60,000 Production cost per part $14.88 $12.45 Years 0 1 2 3 4 Annual part usage quantity 55,000 60,000 62,500 95,000 Time horizon 4 years Income tax rate 15.00% Capital gains tax rate 15.00% MARR 12.50% Depreciation 5 MACRS years 0 1 2 3 4 5 6 MACRS 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% $0 Modern Medical Mechanics (M3) has to replace a production machine used to produce a single part. They need an evalaution of two alternative machine models. The forecasted demand for the part is shown below. The choice of machine will not affect this demand of the part nor the M3 revenue. Both of the new machines will last four years and then be replaced with the salvage values at the end of 4 years that is listed below.   Depreciation will be 5-year MACRS The two machines have the prices, production cost per part, and salvage value in year 4 as shown below. All setup of the new machines is part of the purchase price. Using a 4-year time horizon, document and make a recommendation of which machine should be adopted from a financial perspective. Assume that there will not be any change in Revenue, S.G. & A or working capital resulting from this decision. Platinum Model Titanium Model Purchase price $188,000 $223,000 Salvage value $50,000 $60,000 Production cost per part $14.88 $12.45 Years 0 1 2 3 4 Annual part usage quantity 55,000 60,000 62,500 95,000 Time horizon 4 years Income tax rate 15.00% Capital gains tax rate 15.00% MARR 12.50% Depreciation 5 MACRS years 0 1 2 3 4 5 6 MACRS 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% $0

Explanation / Answer

Net worth of Machine Titatnium is higher and it should be chosen

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