The injection molding machines are need to be replaced. The list is narrowed dow

Question

The injection molding machines are need to be replaced. The list is narrowed down to two options based on various parameters like screw diameter, injection pressure, injection capacity , rate, and screw rpm and so on. Please take a look at the specs and make a recommendation . The Cincinnati Milacron Plastic Injection Molding Machine costs $80,000 and the Kawaguchi machine costs $120,000. Based on the capacity of these machines, it can be safely estimated that the revenue for Cincinnati will be $30,000 for year 1 and $41,500 for Kawaguchi. It is also assumed that the capacity could be increased and thereby the revenue by 20% year after year for the next few years. The maintenance costs will be $2,000 and the amount will increase by $5,000 year after year for the next few years . It can be assumed that the maintenance is the same for both machines. In talking with other companies who use these machines, these machines are capable of producing products for 5 years before major breakdowns occur . Since this is a rough estimate, you can use straight line depreciation. Tax rate for this company is 40%. Assume an after - tax MARR of 15% and calculate the PW of the after tax cash flow. Also, perform a sensitivity analysis on MARR with plus or minus 5%. (Hint: use DATA TABLE

Explanation / Answer

Machine Cincinnati:

Depreciation = 80,000/5 = 16,000 ( Life of asset = 5 yrs, No salvage value)

Tax saving on Depreciation = 16,000* 40% = 6,400

Revenue for the 1 st year = 30000

2 nd year = 30000*120%= 36000

3 rd year = 36000*120% =43,200

4th year = 43,200*120%= 51,840

5th year = 51,840* 120% = 62,208

Calculation of cashflows:

Machine Kawaguchi:

Depreciation = 1,20,000/5 = 24,000 ( Life of asset = 5 yrs, No salvage value)

Tax saving on Depreciation = 24,000* 40% = 9,600

Revenue for the 1 st year = 41,500

2 nd year = 41,500*120%= 49,800

3 rd year = 49,800*120% =59,760

4th year = 59,760*120%= 71,712

5th year = 71,712* 120% = 86,054.4

Calculation of cashflows:

Therefore the Net present value from Kawaguchi is higher.hence it was selected.

Sensitivity Analysis: IF MAAR+ 5%= 20% and MAAR-5%= 10%

Machine Cincinnati:

Machine Kawaguchi:

Machine Kawaguchi will be preferred since it having higher NPV ( If MAAR is -10% (MAAR-5%))

Machine Kawaguchi will be preferred since it having higher NPV ( If MAAR is -20% (MAAR+5%))

Note:the maintenance is the same for both machines will be the same , hence it will not differ the decesion making process. Therefore in this solution the maintence cost was not considered.

Year Cash inflows Tax saving on Depreciation Cash out flows Net cash flows Present value factor@15% Present value cash flows 0 Nil Nil -80000 -80000 1 -80000 1 30000 6400 36400 0.8695 31649.8 2 36000 6400 42400 0.7561 32058.64 3 43200 6400 49600 0.6575 32612 4 51840 6400 58240 0.5717 33295.808 5 62208 6400 68608 0.4972 34111.8976 83728.1456

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