The CROC Co. is considering a new milling machine. They have narrowed the choice

Question

The CROC Co. is considering a new milling machine. They have narrowed the choices down to three alternatives in addition to the Do Nothing Alternative An engineer is considering the purchase of a copy machine for his/her consulting office. The copy machine will cost $2,000 and have a resale value of $400 at the end of its 5-year life. Having the machine in the office will reduce copy costs by $ 1,000 a year. Copy machine maintenance will be $500 for the first year and will increase by $100 each year. Does the machine have any future worth if the interest rate is 6%?

Explanation / Answer

1) The incremental rate of return is computed by deducting high value cash flow less low cash flow project

deluxe has high cash flow and then regular

net benefits of deluxe = 79000 - 16000 = 63000

net benefits of regular = 43000 - 6900 = 36100

Year 0 = -220000 - (-125000) = -95000

Year 1 = 63000 - 36100 = 26900

10 years 15% PVIFA = 5.0188

hence the Net present value Deluxe - regular = 26900*5.0188 - 95000

= 40000

hence we need to increase the MARR to make NPV zero and that percentage would be the IRR

Hence at 25% PVIFA = 3.5705 = 3.5705*26900 = 95000

therefore deluxe - regular the incremental rate of return = 25%

next (Deluxe - alternative economy )

year 0 = -220000 - -(75000) = -145000

benefits = 63000 -20000 = 43000 for 10 years

hence 43000*5.0188 = 215808 -145000 = 70808 + salvage valeu (3000* .247)= 71550

hence we need to increase the MARR to check = at 26.5% the NPV becomes zero

hence deluxe - alternative has incremental rate of return = 26.5%

therefore Project deluxe should be selected since more return is achieved

2) Computation of NPV

Since the NPV is negative there is no scope of the project in future.

Year Cash flow Formula Discount 6% Present value 0 -2000 1 1 -2000 1 500 1000-500 0.94 471.70 2 400 1000-600 0.89 356.00 3 300 1000-700 0.84 251.89 4 200 1000-800 0.79 158.42 5 100 1000-900 0.75 74.73 5 400 0.75 298.90 Net present value -388.37

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.