Question 1 Alan Moore runs an AI company that involves 10 giant Behemoth artificial neural network computers These computers have gotten old and need to be replaced Mr Moore is considering two options 1) replace the existing machines with 10 new and updated Behemoth units (each will cost $800,000 and will not involve any additional operating costs), and 2) purchase 10 new Shikari machines that will cost $1 25 million each and will save $500,000 per year in operator costs Note that Shikari units will last for 10 years, while Behemoth units are becoming obsolete and will last for 7 years Financial analysts have produced a summary table (below) Behemoth Investments Revenues Costs Net cash flow NPV at 15 IRR Payback period Shikari Investments Revenues Costs Net cash flow NPV at 15 IRR Payback period Year 0 8 8 2 4 24 5 3 2 years 12 5 12 5 2 56 20 2 4 2 years Cash flows millions of dollars 17 8 9 10 50 0 0 0 47 5 0 0 0 2 5 0 0 0 50 50 50 50 47 47 47 47 3 3 3 3 (a) Based on the internal rate of return (IRR) figures from the table, which machines should Mr Moore buy, Behemoth or Shikari Is this decision reliable If not, why (20 MARKS) (b) Based on the payback period figures from the table, which machines should Mr Moore buy, Behemoth or Shikari Is this decision reliable If not, why (20 MARKS) (c) Based on the net present value (NPV) figures from the table, which machines should Mr Moore buy, Behemoth or Shikari Is this decision reliable If not, why (20 MARKS) (d) Calculate the equivalent annual benefit (or cost) for each group of machines (Behemoth and Shikari) Based on such calculations, which machines should Mr Moore buy, Behemoth or Shikari Is this decision reliable If not, why (40 MARKS)

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Question 1 Alan Moore runs an AI company that involves 10 giant Behemoth artificial neural network computers. These computers have gotten old and need to

Question 1

Alan Moore runs an AI company that involves 10 giant Behemoth artificial neural network computers. These computers have gotten old and need to be replaced. Mr. Moore is considering two options: 1) replace the existing machines with 10 new and updated Behemoth units (each will cost $800,000 and will not involve any additional operating costs), and 2) purchase 10 new Shikari machines that will cost $1.25 million each and will save $500,000 per year in operator costs. Note that Shikari units will last for 10 years, while Behemoth units are becoming obsolete and will last for 7 years.

Financial analysts have produced a summary table (below).

Behemoth

Investments Revenues Costs Net cash flow NPV at 15% IRR

Payback period

Shikari

Investments Revenues Costs Net cash flow NPV at 15% IRR

Payback period

Year: 0

8 2.4 24.5% 3.2 years

12.5

12.5 2.56 20.2% 4.2 years

Cash flows [millions of dollars] 17 8 9 10

50 0 0 0 47.5 0 0 0 2.5 0 0 0

50 50 50 50 47 47 47 47 3 3 3 3

(a) Based on the internal rate of return (IRR) figures from the table, which machines should Mr. Moore buy, Behemoth or Shikari? Is this decision reliable? If not, why? (20 MARKS)

(b) Based on the payback period figures from the table, which machines should Mr. Moore buy, Behemoth or Shikari? Is this decision reliable? If not, why? (20 MARKS)

(c) Based on the net present value (NPV) figures from the table, which machines should Mr. Moore buy, Behemoth or Shikari? Is this decision reliable? If not, why? (20 MARKS)

(d) Calculate the equivalent annual benefit (or cost) for each group of machines (Behemoth and Shikari). Based on such calculations, which machines should Mr. Moore buy, Behemoth or Shikari? Is this decision reliable? If not, why? (40 MARKS)