ABC Metalworks wants to determine which model sheetcutter to purchase. Three choices are available,

(1) machine 1 costs the least but must be replaced the most frequently, (2) machine 2 has average cost and average lifespan, and (3) machine 3 costs the most but needs only infrequent replacement.

Assume all three machines meet production quality and volume standards. Annual maintenance is inversely proportional to the purchase price (that is, the cheaper machine requires higher maintenance), and machine replacement, being instantaneous, will not disrupt production.

a. Under a flat discount rate assumption of 5 percent per year, calculate the NPV for each machine.

b. Which machine makes the most sense for costefficient production?

c. How does your answer to part b change under a flat 6 percent discount rate assumption? Why?AppendixLO1

Transcribed Image Text:

Machine Machine Machine 1 2 3 Initial cost $2,000 $3,200 $4,500 Annual maintenance $ 400 $ 300 $ 200 Life span 2 years 3 years 4 years