A company is considering two alternatives for a new product line. Machine A: initial cost of $250,000, savings of $70,000 starting in year 1, increasing by 3% each year until the end of its life, annual operating cost of $7,500, salvage of $90,000, and useful life of 5 years.

Machine B: initial cost of $375,000, savings of $250,000 starting in year 2, decreasing by $10,000 each year until the end of its life, a part replacement in year 4 which costs $100,000, a salvage value of $100,000, and a useful life of 7 years.

Use ROR analysis to answer the following.

For machine 1, Annual cash flow = savings - costs, year 6 cash flow is up by $96,000.

For machine 2, Annual cash flow = savings - costs, year 9 cash flow is up by $90,000, year 2 cash flow is down by $20,000.

a) If funds have to be borrowed at 10%, which machine should be chosen?

b) What is the interest rate of the return for the chosen option?

c) If the funding is internal and MARR is set to 18%, should we buy the chosen machine?