Evaluate the investment project. The project life is 5 years. Machine A Purchasing cost: $23000 Annual Maintenance Cost: $2500 Produces 10000 units/year Machine B Purchasing cost: $15000 Annual Maintenance Cost: $2000 Produces 6500 units/year Forecasted Demands for the next 5 years: Year 1 2 Demand 15000 16000 17000 (Should not produce more than the forecasted demand per year) 4 18000 5 19000 The company sells a unit produced for $3.20. The cost of raw materials is $0.40 per unit produced. The company pays $14/hour. Workers need 3 minutes to finish one unit using Machine A and 4 minutes using Machine B. The annual overhead (fixed cost) is $6000. Installation fee is $2000 for Machine A and $2500 for Machine B. The machines last for 10 years and fall in the 7-year MACRS class. The machines will be salvaged at the end of year 5 for 30% of the purchasing cost for each machine. MARR: 20% Tax rate: 24% 1. Make an income statement and a cash flow statement for each alternative using a spreadsheet and show PW and IRR for each project. Which option is better? Why? 2. You are considering borrowing $10000 with 7% APR compounding monthly and repayment would be in 4 equal annual payments. Should you take the loan? Why? Show work for both Machine A and Machine B. 3. Perform a sensitivity analysis for Machine A using the $10000 loan. Plot the sensitivity diagram and make a table for each change on the following variables below and the best-case scenario showing the NPWs. Assume that each of these variables can deviate from its best-case expected value by +10%, 20%, and +30%. Show work using graphs, tables, etc. a. Initial investment (installation cost is not included) b. Material cost ($/unit) c. Unit price ($/unit) d. Labor cost ($/hour) 4. What should the break-even unit price be when the company NPV is zero if the company uses the loan of $10000 for Machine A and Machine B? Evaluate the investment project. The project life is 5 years. Machine A Purchasing cost: $23000 Annual Maintenance Cost: $2500 Produces 10000 units/year Machine B Purchasing cost: $15000 Annual Maintenance Cost: $2000 Produces 6500 units/year Forecasted Demands for the next 5 years: Year 1 2 Demand 15000 16000 17000 (Should not produce more than the forecasted demand per year) 4 18000 5 19000 The company sells a unit produced for $3.20. The cost of raw materials is $0.40 per unit produced. The company pays $14/hour. Workers need 3 minutes to finish one unit using Machine A and 4 minutes using Machine B. The annual overhead (fixed cost) is $6000. Installation fee is $2000 for Machine A and $2500 for Machine B. The machines last for 10 years and fall in the 7-year MACRS class. The machines will be salvaged at the end of year 5 for 30% of the purchasing cost for each machine. MARR: 20% Tax rate: 24% 1. Make an income statement and a cash flow statement for each alternative using a spreadsheet and show PW and IRR for each project. Which option is better? Why? 2. You are considering borrowing $10000 with 7% APR compounding monthly and repayment would be in 4 equal annual payments. Should you take the loan? Why? Show work for both Machine A and Machine B. 3. Perform a sensitivity analysis for Machine A using the $10000 loan. Plot the sensitivity diagram and make a table for each change on the following variables below and the best-case scenario showing the NPWs. Assume that each of these variables can deviate from its best-case expected value by +10%, 20%, and +30%. Show work using graphs, tables, etc. a. Initial investment (installation cost is not included) b. Material cost ($/unit) c. Unit price ($/unit) d. Labor cost ($/hour) 4. What should the break-even unit price be when the company NPV is zero if the company uses the loan of $10000 for Machine A and Machine B
