The Zentex Company wants to purchase a computerized tool and die machine that wi

Question

The Zentex Company wants to purchase a computerized tool and die machine that will save $50,000 per year System 1 & 2 listed below are the only machines being considered. Computerized tool and die machine that will save $50.000 per year systems 1 & 2 listed below are the only machines being considered. costs $50,000, has a useful life of eight years and a salvage value of $6,000. Machine 2 costs $40,000, has a useful life of four years and a salvage value of $4,000. Machine 3 costs $100,000 has a useful life of 3 years and a salvage value of $0.00 Machine 4 is a refurbished machine, costs $20,000, has no warranty and the life is unknown. Machine 5 is a soft serve ice cream machine that produces five gallons of ice cream per hour, and costs $10,000. Based on the company's IRR of 8%, which one should be selected on the basis of RCR criterion?

Explanation / Answer

Cost Useful Life Benefit per year DCF of Benefits BCR Preferrable option Machine 1 50000 8 50000 295327 Refer Note 1 DCF of Benefits/Cost 5.90654 Higher Machine 2 40000 4 50000 168546 Refer Note 2 DCF of Benefits/Cost 4.21365 Machine 3 100000 3 NA Refurbished 20000 unknown NA Soft Serve Ice Crème Machine 10000 NA Note 1 Year 1 2 3 4 5 6 7 8 Benefit 50000 50000 50000 50000 50000 50000 50000 56000 DCF 0.9259259 0.85733882 0.793832 0.73503 0.680583 0.63017 0.630169627 0.58349 DCV of Inflow 46296.296 42866.94102 39691.61 36751.49 34029.16 31508.48 31508.48134 32675.46 Note 2 Year 1 2 3 4 Benefit 50000 50000 50000 54000 DCF 0.9259259 0.85733882 0.793832 0.73503 DCV of Inflow 46296.296 42866.94102 39691.61 39691.61

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