Question

MKM International is seeking to purchase a new CNC machine in order to reduce costs. Two alternative machines are in consideration. Machine 1 costs $550,000, but yields a 15 percent savings over the current machine used. Machine 2 costs $850,000, but yields a 25 percent savings over the current machine used. In order to meet demand, the following forecasted cost information for the current machine is also provided. Year 1 2 3 4 Project Cost 1,000,000 1,350,000 1,450,000 1,500,000 2,400,000 5 a. Based on the NPV of the cash flows for these 5 years, which machine should MKM International purchase? Assume a discount rate of 11 percent. Assuming a discount rate of 11 percent, MKM International should purchase because the NPV of machine 1 is S and the NPV of machine 2 is $ (Enter your responses rounded to the nearest whole number.)

Answer 1

MKM International Savings in Project Costs Present Value PV factor @ Machine 1 - Machine 2 - Year 11% Project Cost 15% 25% Machine 1 Machine 2 (A) (B) (C) (AxB) (AxC) 1 0.90090 $ 1,000,000 $ 150,000 $ 250,000 $ 135,135 $ 225,225 2 0.81162 $ 1,350,000 $ 202,500 $ 337,500 $ 164,354 $ 273,923 3 0.73119 $ 1,450,000 $ 217,500 $ 362,500 $ 159,034 $ 265,057 4 0.65873 $ 1,500,000 $ 225,000 $ 375,000 $ 148,214 $ 247,024 5 0.59345 $ 2,400,000 $ 360,000 $ 600,000 $ 213,642 $ 356,071 Present Value of Cash Savings : $ 820,380 $ 1,367,300 less: Initial Investments $ 550,000 $ 850,000 $ 270,380 $ 517,300 Assuming a discount rate of 11 percenr, MKM International should purchase because NPV of machine 1 is $ 270,380 and the NPV of machine 2 is Machine 2 $ 517,300

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