On the Level Construction Company has been growing and needs to purchase a new machine. They have been researching multiple companies and have narrowed down their choices to two options based on reliability and customer service. They now need the help of accounting to determine which option is better financially.

Company 1 - Millipede

The equipment would cost $3,000,000 up front.

It has a 12 year useful life.

Millipedes equipment would allow for 2 additional construction jobs per year.

Company 2 Jack Moose

The equipment would cost $4,000,000 up front.

It has a 10 year useful life.

Jack Mooses equipment would allow for 3 additional construction jobs per year.

Each construction job requires a certain number of machines, and On the Level has determined that each additional construction job for the year would generate an additional $300,000 in Revenue. Because they receive their income after the job is complete, assume revenue is received at the end of each year. On the Levels expected annual rate of return is 11%

Questions:

1. Calculate NPV for each equipment option.

2. Calculate ROI for both investments.

3. Calculated expected annual ROI for both investments.

4. Would On the Level make the same decision if they used ROI for their investment analysis? What are the differences between the calculations?

5. A few years after purchasing the equipment, On the Level realizes that the new equipment is only generating an additional $250,000 in Revenue per year. How does this impact the NPV/IRR and ROI calculations and their decision? Did they make the right decision?