Financial Evaluation of Two Options A manufacturing process consists of two operations to be performed on two different machines in a sequence. Management can buy both machines as a set from two different suppliers. The life span of both machines of supplier A is 10 years and costs $11 million. The life span of both machines of supplier B is 15 years and costs $20 million. If purchased from supplier A, machine 1 can develop a fault with probability of 2%, whereas machine 2 can develop a fault with probability of 1% during operation. Similarly, if purchased from supplier B, machine 1 can develop a fault with probability of 1%, whereas machine 2 can develop a fault with probability of 3% during operation. If a machine fails to work, a repairperson is called. The repair time of both machines from supplier A is uniformly distributed over a period of 4 to 8 days, whereas the repair time of both machines from supplier B is uniformly distributed over a period of 6 to 10 days. When both machines are working, they can produce 1000 units per day in terms of manufactured products. Each unit sold generates a net profit of 5 dollars. Assume 300 working days in a year and that manufactured product is sold every 30 days. Before the purchase is finalized, the management wants you to carry out a financial analysis and answer the following questions. Questions: 1. Using a fixed discount rate of 10%, determine which set of machines is better. 2. The management wants to achieve an annual IRR of 15 percent (IRR stands for internal rate of return. It is basically the profit achieved on $100 after one year. For example, an IRR of 20 percent per year means that investing $100 will generate a profit of $20 after one year, and so the total money returned after one year will be $120). Is it achievable at current price/profit level? If not, how much price/profit level will have to be increased? Calculate this for both suppliers