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Andrea Inc. decides to get into the business of producing tables for offices. To do that they need to buy a machine that cuts and
Andrea Inc. decides to get into the business of producing tables for offices. To do that they need to buy a machine that cuts and laminates the wood. The units of tables to be sold if this project is undertaken is Year 1 Year 2 Year 3 Year 4 Units to be sold 1,000 1,200 1,300 1,100 Year 5 900 Year 6 800 They have two choices of machines, Machine A costs $50,000 and Machine B costs $62,000. Machine B creates a better looking product using the same materials Both machines have a useful life of 6 years. Machine A's salvage value is $5,000 and Machine's B salvage value is $6,000. The price of the tables if they choose Machine A will be $74 and if they choose Machine B it will be $80. All sales are done in cash Costs related to these sales are $60 per table (no matter which machine). These costs are paid in cash In both cases the working capital needed is $8000. And it is released at the end of 6 years. Both machines are depreciated using the straight-line method and the company pays 10% tax on its net income. The discount rate is 14%. Required: Points a. Construct the cash flow time-line. What is the net present value of each project? In which one they should invest? 32 b. What is the net present value of each project? In which one they should invest? 12 c. What is the Internal Rate of Return of each project? In which one they invest according to IRR? 11 d. Calculate the Payback period of this investment to the nearest month. In which one they should invest according to this method? e. In which Machine should they invest considering all methods, express your opinion. 7 f. Discuss the advantages and disadvantages of each of the 3 methods above. 13 15 Solve here
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