Machine A has an initial cost of $100,000 and a useful lifespan of 12 years. It

Question

Machine A has an initial cost of $100,000 and a useful lifespan of 12 years. It will save $30,000 per year during the first 3 years and then $15,000 per year until the end of its useful life. It will have a salvage value of $15,000 at that point. Machine B has an initial cost of $125,000 and a useful lifespan of 12 years. It will save $25,000 per year during the first 5 years and then $30,000 per until the end of its useful life. It will have no salvage value. Assume a MARR of 10%.

What is the payback period of machine A? 3.67

What is the payback period of machine B? 5

Based on payback analysis, which machine would be a better investment? A

What is the rate of return for machine A? 18.65

What is the rate of return for machine B? 17.89

What is the incremental rate of return for the two machines?

Based on rate of return analysis, which machine would be the better investment?

I just need help finding the IRR and which machine to choose based off of that, but included the other values to help, thanks so much!!

Explanation / Answer

Machine A Machine B cash inflow present value @10% present value of cash inflow cash inflow present value @10% present value of cash inflow year -100000 year -125000 1 30000 0.909091 27272.73 1 25000 0.909091 22727.27 2 30000 0.826446 24793.39 2 25000 0.826446 20661.16 3 30000 0.751315 22539.44 3 25000 0.751315 18782.87 4 15000 0.683013 10245.2 4 25000 0.683013 17075.34 5 15000 0.620921 9313.82 5 25000 0.620921 15523.03 6 15000 0.564474 8467.109 6 30000 0.564474 16934.22 7 15000 0.513158 7697.372 7 30000 0.513158 15394.74 8 15000 0.466507 6997.611 8 30000 0.466507 13995.22 9 15000 0.424098 6361.464 9 30000 0.424098 12722.93 10 15000 0.385543 5783.149 10 30000 0.385543 11566.3 11 15000 0.350494 5257.408 11 30000 0.350494 10514.82 12 30000 0.318631 9558.925 12 30000 0.318631 9558.925 sum of present value of cash flow 144287.6 sum of present value of cash flow 185456.8 cash outflow 100000 cash outflow 100000 NPV 44287.62 NPV 85456.82 IRR 9.05% IRR 7.83% Machine A would be preferred for investment as its IRR is greater than Machine B

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