MKM International is seeking to purchase a new CNC machine in order to reduce costs. Two...
MKM International is seeking to purchase a new CNC machine in order to reduce costs. Two alternative machines are in consideration. Machine 1 costs $ 450 comma 000, but yields a 15 percent savings over the current machine used. Machine 2 costs $ 950 comma 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. LOADING... Year Project Cost 1 950 comma 000 2 1 comma 350 comma 000 3 1 comma 450 comma 000 4 1 comma 550 comma 000 5 2 comma 400 comma 000 a. Based on the NPV of the cash flows for these 5 years, which machine should MKM International purchase? Assume a discount rate of 13 percent. Assuming a discount rate of 13 percent, MKM International should purchase ▼ because the NPV of machine 1 is $ nothing and the NPV of machine 2 is $ nothing. (Enter your responses rounded to the nearest whole number.) b. If MKM International lowered its required discount rate to 7 percent, what machine would it purchase? Assuming a discount rate of 7 percent, MKM International should purchase ▼ machine 1 machine 2 because the NPV of machine 1 is $ nothing and the NPV of machine 2 is $ nothing. (Enter your responses rounded to the nearest whole number.)
Homework Answers
Answer in MS Excel Sheet with step by step Solution:
| Machine 1 | |||||
| Statement | Type | Year | Amount in USD | Factor for discount rate @ 13% | Present Value in USD |
| Original Cost | Cash Outflow | 0 | -450000 | 1 | -450000 |
| Project Cost | Cash Outflow | 1 | -950000 | 0.884955752 | -840707.9646 |
| Project Cost | Cash Outflow | 2 | -1350000 | 0.783146683 | -1057248.023 |
| Project Cost | Cash Outflow | 3 | -1450000 | 0.693050162 | -1004922.735 |
| Project Cost | Cash Outflow | 4 | -1550000 | 0.613318728 | -950644.0279 |
| Project Cost | Cash Outflow | 5 | -2400000 | 0.542759936 | -1302623.846 |
| Saving | Cash Inflow | 5 | 67500 | 0.542759936 | 36636.29568 |
| Net Present Value or NPV = | -5569510.301 (Outflow)= -5569510 | ||||
| Machine 2 | |||||
| Statement | Type | Year | Amount in USD | Factor for discount rate @ 13% | Present Value in USD |
| Original Cost | Cash Outflow | 0 | -950000 | 1 | -950000 |
| Project Cost | Cash Outflow | 1 | -950000 | 0.884955752 | -840707.9646 |
| Project Cost | Cash Outflow | 2 | -1350000 | 0.783146683 | -1057248.023 |
| Project Cost | Cash Outflow | 3 | -1450000 | 0.693050162 | -1004922.735 |
| Project Cost | Cash Outflow | 4 | -1550000 | 0.613318728 | -950644.0279 |
| Project Cost | Cash Outflow | 5 | -2400000 | 0.542759936 | -1302623.846 |
| Saving | Cash Inflow | 5 | 237500 | 0.542759936 | 128905.4848 |
| Net Present Value or NPV = | -5977241.112 (Outflow) = -5977241 |
Interpretation: as per above Table and calculation, using discount rate of 13%, we find that NPV for using Machine A is Higher than that of Machine B, Thus, we will select Machine A for this project purpose, NPV Value for Machine A and Machine B written in the MS Excel Sheet,
Formula Presented for Reference:
| 1 | B | C | D | E | F | G |
| 2 | Machine 1 | |||||
| 3 | Statement | Type | Year | Amount in USD | Factor for discount rate @ 13% | Present Value in USD |
| 4 | Original Cost | Cash Outflow | 0 | -450000 | =1/(1+0.13)^D4 | =E4*F4 |
| 5 | Project Cost | Cash Outflow | 1 | -950000 | =1/(1+0.13)^D5 | =E5*F5 |
| 6 | Project Cost | Cash Outflow | 2 | -1350000 | =1/(1+0.13)^D6 | =E6*F6 |
| 7 | Project Cost | Cash Outflow | 3 | -1450000 | =1/(1+0.13)^D7 | =E7*F7 |
| 8 | Project Cost | Cash Outflow | 4 | -1550000 | =1/(1+0.13)^D8 | =E8*F8 |
| 9 | Project Cost | Cash Outflow | 5 | -2400000 | =1/(1+0.13)^D9 | =E9*F9 |
| 10 | Saving | Cash Inflow | 5 | =-0.15*E4 | =1/(1+0.13)^D10 | =E10*F10 |
| 11 | Net Present Value or NPV = | =SUM(G4:G10) | ||||
| 12 | ||||||
| 13 | Machine 2 | |||||
| 14 | Statement | Type | Year | Amount in USD | Factor for discount rate @ 13% | Present Value in USD |
| 15 | Original Cost | Cash Outflow | 0 | -950000 | =1/(1+0.13)^D15 | =E15*F15 |
| 16 | Project Cost | Cash Outflow | 1 | -950000 | =1/(1+0.13)^D16 | =E16*F16 |
| 17 | Project Cost | Cash Outflow | 2 | -1350000 | =1/(1+0.13)^D17 | =E17*F17 |
| 18 | Project Cost | Cash Outflow | 3 | -1450000 | =1/(1+0.13)^D18 | =E18*F18 |
| 19 | Project Cost | Cash Outflow | 4 | -1550000 | =1/(1+0.13)^D19 | =E19*F19 |
| 20 | Project Cost | Cash Outflow | 5 | -2400000 | =1/(1+0.13)^D20 | =E20*F20 |
| 21 | Saving | Cash Inflow | 5 | =-0.25*E15 | =1/(1+0.13)^D21 | =E21*F21 |
| 22 | Net Present Value or NPV = | =SUM(G15:G21) |
| Machine 1 | |||||
| Statement | Type | Year | Amount in USD | Factor for discount rate @ 7% | Present Value in USD |
| Original Cost | Cash Outflow | 0 | -450000 | 1 | -450000 |
| Project Cost | Cash Outflow | 1 | -950000 | 0.934579439 | -887850.4673 |
| Project Cost | Cash Outflow | 2 | -1350000 | 0.873438728 | -1179142.283 |
| Project Cost | Cash Outflow | 3 | -1450000 | 0.816297877 | -1183631.921 |
| Project Cost | Cash Outflow | 4 | -1550000 | 0.762895212 | -1182487.579 |
| Project Cost | Cash Outflow | 5 | -2400000 | 0.712986179 | -1711166.831 |
| Saving | Cash Inflow | 5 | 67500 | 0.712986179 | 48126.56712 |
| Net Present Value or NPV = | -6546152.514(Outflow) = -6546153 | ||||
| Machine 2 | |||||
| Statement | Type | Year | Amount in USD | Factor for discount rate @ 7% | Present Value in USD |
| Original Cost | Cash Outflow | 0 | -950000 | 1 | -950000 |
| Project Cost | Cash Outflow | 1 | -950000 | 0.934579439 | -887850.4673 |
| Project Cost | Cash Outflow | 2 | -1350000 | 0.873438728 | -1179142.283 |
| Project Cost | Cash Outflow | 3 | -1450000 | 0.816297877 | -1183631.921 |
| Project Cost | Cash Outflow | 4 | -1550000 | 0.762895212 | -1182487.579 |
| Project Cost | Cash Outflow | 5 | -2400000 | 0.712986179 | -1711166.831 |
| Saving | Cash Inflow | 5 | 237500 | 0.712986179 | 169334.2176 |
| Net Present Value or NPV = | -6924944.864(Outflow) = -6924945 |
Interpretation: as per above Table and calculation, using discount rate of 7%, we find that NPV for using Machine A is Higher than that of Machine B, Thus, we will select Machine A for this project purpose, NPV Value for Machine A and Machine B written in the MS Excel Sheet,
Formula Presented for Reference:
| 1 | B | C | D | E | F | G |
| 2 | Machine 1 | |||||
| 3 | Statement | Type | Year | Amount in USD | Factor for discount rate @ 7% | Present Value in USD |
| 4 | Original Cost | Cash Outflow | 0 | -450000 | =1/(1+0.07)^D4 | =E4*F4 |
| 5 | Project Cost | Cash Outflow | 1 | -950000 | =1/(1+0.07)^D5 | =E5*F5 |
| 6 | Project Cost | Cash Outflow | 2 | -1350000 | =1/(1+0.07)^D6 | =E6*F6 |
| 7 | Project Cost | Cash Outflow | 3 | -1450000 | =1/(1+0.07)^D7 | =E7*F7 |
| 8 | Project Cost | Cash Outflow | 4 | -1550000 | =1/(1+0.07)^D8 | =E8*F8 |
| 9 | Project Cost | Cash Outflow | 5 | -2400000 | =1/(1+0.07)^D9 | =E9*F9 |
| 10 | Saving | Cash Inflow | 5 | =-0.15*E4 | =1/(1+0.07)^D10 | =E10*F10 |
| 11 | Net Present Value or NPV = | =SUM(G4:G10) | ||||
| 12 | ||||||
| 13 | Machine 2 | |||||
| 14 | Statement | Type | Year | Amount in USD | Factor for discount rate @ 7% | Present Value in USD |
| 15 | Original Cost | Cash Outflow | 0 | -950000 | =1/(1+0.07)^D15 | =E15*F15 |
| 16 | Project Cost | Cash Outflow | 1 | -950000 | =1/(1+0.07)^D16 | =E16*F16 |
| 17 | Project Cost | Cash Outflow | 2 | -1350000 | =1/(1+0.07)^D17 | =E17*F17 |
| 18 | Project Cost | Cash Outflow | 3 | -1450000 | =1/(1+0.07)^D18 | =E18*F18 |
| 19 | Project Cost | Cash Outflow | 4 | -1550000 | =1/(1+0.07)^D19 | =E19*F19 |
| 20 | Project Cost | Cash Outflow | 5 | -2400000 | =1/(1+0.07)^D20 | =E20*F20 |
| 21 | Saving | Cash Inflow | 5 | =-0.25*E15 | =1/(1+0.07)^D21 | =E21*F21 |
| 22 | Net Present Value or NPV = | =SUM(G15:G21) |
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