Three machines under consideration for purchase. All have equal useful lives but

Question

Three machines under consideration for purchase. All have equal useful lives but have different purchase costs and yearly energy and operating costs. Use the incremental rate of return method to support the claim by the salesmen for both of the higher cost machines that their machines 'pay for themselves' by returning more value than the lowest cost machine through reduced operating and energy costs exceeding the MARR of the firm, 9.00%. Verify whether either salesmen's claims are true compared to the lowest cost machine and identify which machine should be purchased based on economic value. Report details of your analysis to receive full credit for the problem.

Explanation / Answer

Cash flows and NPV of each machine are calculated in an excel sheet as follows

NPV = NPV(9%,G3:G7)+G2 = -25,989.39

NPV = NPV(9%,G3:G7)+G2 = -26,046.11

NPV = NPV(9%,G3:G7)+G2 = -25,751.88

So since NPV of Machine Top is higher, we will select Machine Top

And also salesman here is incorrect because 2 higher costs machines, Top and Middle are having NPV more and less compared to Little respectively. He is corect about only Machine Top but incorrect about machine Middle.

Year Little Energy Cost Top Salvage Value Total Cashflow 0            (11,020.00)          (11,020.00) 1                             -        (2,900.00)              (1,800.00)            (4,700.00) 2                             -        (2,900.00)              (1,900.00)            (4,800.00) 3                             -        (2,900.00)              (2,000.00)            (4,900.00) 4                             -        (2,900.00)              (2,100.00)             1,000.00            (4,000.00)

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