MKM International is seeking to purchase a new CNC machine in order to reduce costs. Two alternative machines are in consideration. Machine 1 costs 500K, but yields a 15% savings over the current machine used. Machine 2 costs 900K but yields a 25% savings over the current machine used. In order to meet demand, the following forecasted cost information for the current machine is also provided.

Year projected cost

1 1.000.000

2 1.350.000

3 1.400.000

4 1.450.000

5 2.550.000

a) based on the NPV of the cash flows for these five years, which machine should MKM international purchase? Assume a discount rate of 12%.

Also, if MKM international lowered its required discount rate to 8%, what machine would it purchase?