(2) (12 pts) ABC company is considering two different injection molding machines
ID: 2657041 • Letter: #
Question
(2) (12 pts) ABC company is considering two different injection molding machines for the nevw 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%. Model 24-T Model Initial cost Annual operating cost Benefits Year Salvage value Life $440K 75K 150K 35K S580K 35K 130K 30K 12 Years a) Calculate the rate of return for each alternative. What is your conclusion for part a? Using the internal rate of return (IRR) analysis, which machine should be selected? b) 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 acceptedExplanation / Answer
a. Rate of return for X21-T Model 0=-440-(75*(1-(1+r)^-12)/r)+(150*(1-(1+r)^-12)/r)+(35/(1+r)^12) ROR=13.58% Rate of return for Z 24-T Model 0=-580-(35*(1-(1+r)^-12)/r)+(130*(1-(1+r)^-12)/r)+(30/(1+r)^12) ROR=12.59% Based on the rate of return , X 21-T Model gives greater return . So, SELECT X 21-T -Model b. IRR using Interpolation method X21-T-Model NPV using 2 diff. cost of capitals around the MARR NPV at 9% NPV=-440-(75*(1-(1+0.09)^-12)/0.09)+(150*(1-(1+0.09)^-12)/0.09)+(35/(1+0.09)^12) 109.50 NPV at 15% NPV=-440-(75*(1-(1+0.15)^-15)/0.15)+(150*(1-(1+0.15)^-15)/0.15)+(35/(1+0.15)^12) 5.09 IRR=LOR+(NPV(L)/((NPV(L)-NPV(H))*(H-L)) ie. IRR=9%+((109.5/(109.5-5.09))*(15%-9%)) 14.73% Z 24-T Model NPV using 2 diff. cost of capitals around the MARR NPV at 9% NPV =-580-(35*(1-(1+0.09)^-12)/0.09)+(130*(1-(1+0.09)^-12)/0.09)+(30/(1+0.09)^12) 110.93 NPV at 15% NPV=-580-(35*(1-(1+0.15)^-12)/0.15)+(130*(1-(1+0.15)^-12)/0.15)+(30/(1+0.15)^12) -59.43 IRR=LOR+(NPV(L)/((NPV(L)-NPV(H))*(H-L)) ie. IRR=9%+((110.93/(110.93-59.43))*(15%-9%)) 12.91% Based on IRR (interpolation method) also X21-T-Model Has the highest IRR of 14.73% So SELECT X21-T-Model
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