(2) (12 pts) ABC company is considering two different injection molding machines
ID: 2657189 • Letter: #
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 Initial cost Annual operating cost Benefits Year Salvage value Life $440K 75K 50K 35K Z24-T Model S580K 35K 30K 30K 12 Years a) Calculate the rate of return for each alternative. What is your conclusion for part a? b) 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%). Useinterpolation to find i values. Excel solution is NOT acceptedExplanation / Answer
(a.)
X21-T MODEL
Rate of return = npv/initial investment = 82.215/440 = 0.18685 or 18.685%
Z24-T MODEL
Rate of return = npv/initial investment = 76.9/580 = 0.13259 or 13.259%
X21-T MODEL should be selected because it's rate of return is more.
Note: NPV is initial investment minus PV of cash flows.
(b.)
X21-T MODEL
Calculating IRR using interpolation, R1 + NPV1*(R2-R1)/(NPV1-NPV2)
R1 is taken as 10% at which NPV1 is equal to $82.215k.
R2 is taken as 14%, calculating NPV
IRR = 10 + 82.215*4/(82.215-(8.145)) = 10 + 328.86/90.36 = 10+ 3.6394 = 13.6394%
Z24-T MODEL
Calculating IRR using interpolation, R1 + NPV1*(R2-R1)/(NPV1-NPV2)
R1 is taken as 10% at which NPV1 is equal to $76.9k
R2 is taken as 13%, calculating NPV
IRR = 10 + 76.9*3/(76.9-(10.86)) = 10 + 230.7/87.76 = 10 + 2.6287 = 12.6287%
X21-T MODEL should be selected because it's IRR is higher .
Year Initial Investment Benefits Operating Cost Cash Flow PV factor @10% PV of Cash Flows 0 (440k) 1-11 150k (75k) 75k 6.495 (cumulative) 487.125k 12 150+35=185k (75k) 110k 0.319 35.09k NPV 82.215kRelated Questions
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