ABC Foods Inc. specializes in producing high quality dry food for dogs and cats. The companys required rate of return is 11% and is investigating the opportunity to purchase one of the machines described below.

A new blending machine is required to improve the process of blending the dry ingredients for dog foods product line. The machine will save per year $7,500 of maintenance and repair, $2,200 of material wastage and $3,400 of labour costs. The blending machine costs $110,500. Its projected life is estimated to be eight years and will have a salvage value of $5,600.

A new compounding machine is required for the cat foods product line. The machine will be used to compound the dry ingredients before granulating. The implementation of the new equipment will save annually $9,000 of maintenance and repair costs, $3,500 of material wastage and $2,000 of labour costs. The cost of the compounding machine is $76,000 and has and estimated useful life of ten years. The machine has no salvage value; however, it will require an overhaul of $1,200 in year 7.

Instructions

(a) Determine the expected net annual cash flow for the above two projects. (3 marks)

(b) Compute the internal rate of return for both projects. Clearly state the PV factor(s) used. (5 marks)

(c) Which machine should the company purchase? Why?

please consider cash flow of each year separately