Question
Maryville Cleaners has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of
Maryville Cleaners has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of $40,000. It will cost an additional $10,000 to have the machine delivered and installed, and the expected residual value at the end of four years is $2,000. Machine B has a four-year expected life and a cost of $60,000. It will cost an additional $15,000 to have machine delivered and installed, and the expected residual value at the end of four years is $5,000. The company has a required rate of return of 10 percent. Additional cash flows related to the machines are as follows:
Machine A
Item | Year 1 | Year 2 | Year 3 | Year 4 |
Labor savings | $10,000 | $15,000 | $20,000 | $25,000 |
Power savings | 1,500 | 1,500 | 1,500 | 1,500 |
Chemical savings | 3,000 | 3,000 | 3,000 | 3,000 |
Additional maintenance costs | (1,200) | (1,200) | (1,200) | (1,200) |
Additional miscellaneous costs | (2,500) | (2,500) | (2,500) | (2,500) |
Machine B
Item | Year 1 | Year 2 | Year 3 | Year 4 |
Labor savings | $20,000 | $25,000 | $30,000 | $35,000 |
Power savings | 2,000 | 2,000 | 2,000 | 2,000 |
Chemical savings | 3,500 | 3,500 | 3,500 | 3,500 |
Additional maintenance costs | (1,500) | (1,500) | (1,500) | (1,500) |
Additional miscellaneous costs | (3,000) | (3,000) | (3,000) | (3,000) |
Required
- Compute the payback period for each of the two machines.
- Compute the net present value for each of the two machines.
- Determine the internal rate of return for each of the two machines.
- Which machine purchase do you recommend that the company pursue based on the results of your calculations?
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