(2) (12 pts) ABC company is considering two different injection molding machines

Question

(2) (12 pts) ABC company is considering two different injection molding machines for the new production line. They have to choose one of these two models. The cost data for the two alternatives are given in the table below. MARR is 10% X21-T Model Z24-T Model Initial cost Annual operating cost Benefits /Year Salvage value Life S440K 75K 150K 35K $580K 35K 130K 30K 12 Years a) b) Calculate the rate of return for each alternative. What is your conclusion for part a? Using the internal rate of return (IRR) analysis, which machine should be selected? Show all the required steps. Round the answer to 4 decimal place (0.1234 0r 12.34%). Use interpolation to find i values. Excel solution is NOT accepted

Explanation / Answer

Requirement A X21- T Model Z24- T Model Year Cash Flows PVF @10% DCF Year Cash Flows PVF @12% DCF 0 -440000 1.00000 -440000 0 -580000 1.00000 -580000 1-12 75000 6.81369 511026.8 1-12 95000 6.81369 647300.6 12 35000 0.31863 11152.05 12 30000 0.31863 9558.9 Total NPV 82178.8 Total NPV 76859.45 Rate of Return = NPV/Initial Investment Rate of Return = NPV/Initial Investment = 82178.80/440000 = 76859.50/580000 = 18.68% = 13.25% Conclusion X21- T Model is better due to higher rate of return Requirement B X21- T Model Z24- T Model Year Cash Flows PVF @13% DCF PVF @14% DCF Year Cash Flows PVF @12% DCF PVF @13% DCF 0 -440000 1.00000 -440000 1.00000 -440000 0 -580000 1.00000 -580000 1.00000 -580000 1-12 75000 5.91765 443823.8 5.66029 424521.8 1-12 95000 6.19437 588465.2 5.91765 562176.8 12 35000 0.23071 8074.85 0.20756 7264.6 12 30000 0.25668 7700.4 0.23071 6921.3 Total NPV 11898.6 -8213.65 Total NPV 16165.55 -10902 Hence by Interpolation, Hence by Interpolation, IRR = 13% + (11898.60/(11898.60+8213.65) IRR = 12% + (16165.60/(16165.60+10902) =13% +0.59% =12% +0.60% =13.59% =12.60% Conclusion Z24- T Model is better due to lower IRR

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