The MIT Whitehead Institute must choose between two cDNA microarray machines to

Question

The MIT Whitehead Institute must choose between two cDNA microarray machines to expand their high-throughput genomic laboratory. Both of these machines have the same function, and the firm will only choose on vendor from which to purchase their machines.

The first machine, manufactured by Amersham Pharmacia (machine 1), will cost $250,000. The second machine, manufactured by PE Applied Biosystems (machine 2), will cost $200,000.

The cost of capital for both of these investments is 10%. The life for both machines is estimated to be 5 years. During this period, cash flows for machine 1 will be $80,000 per year and cash flows for machine 2 will be $65,000 per year. These cash flows include depreciation expenses. Calculate NPV and IRR for each machine and select the best choice for the MIT Whitehead Institute.

Explanation / Answer

using NPV = - I + a((1+k)^n-1)/(k(1+k)^n) where, I = investment, a = annual cash flows, k = cost of capital, n = n0. of periods. NPV of machine 1 = -250000 + 80000((1+0.10)^5 -1)/(0.10(1+0.100^5) => = 238403.12 ($) (ANSWER) NPV of machine 2 = -200000 + 65000(1.1^5-1)/(0.1*1.1*5) => = 127848.82 ($) (ANSWER) Let IRR be r. At IRR, r, NPV = 0 and k = r in NPV formula. So, for machine 1 NPV = 0 = -250000 +80000((1+r)^5-1)/(r(1+r)^5) at r= 0.18, NPV = 173.7 at r = 0.1803= 18.03% , NPV= 3.77 almost 0 (ANSWER) So, for machine 2 NPV = 0 = -200000 +65000((1+r)^5-1)/(r(1+r)^5) at r= 0.1872, NPV = - 4.98 almost 0. (ANSWER) NPV is higher for machine 1 and so this is acceptable. IRR is higher for machine 2 and so this may be accepted as per IRR. However, NPV method is more acceptable as in IRR method discount rate is higher than cost of capital and does not give accurate picture. Hence, machine 1 is the best choice. (ANSWER)

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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