Suzanne is recently retired and enjoys quilting. She is considering starting a quilting business to keep her busy in her retirement. She has 2 options when purchasing a long arm quilting machine.

A) She can purchase a longarm quilting machine for $17,000, with this machine she believes that she will be able to quilt 7.5 quilts a week.

B) She could purchase an automated quilting machine for $40,000, using this machine she believes that she will be able to quilt 4 quilts a day for 5 days a week. In either case, Suzanne figures she can charge 4 cents a square inch and make about $70 per quilt (an average quilt is about 36x48 inches).

She also figures that each quilt will cost her about $20 dollars in material (batting and thread). She expects to run her quilting company for 5 years and expects that her sales and costs will each increase each year by 5%. She will have no relevant fixed expenses as she will operate the business out of her own home.

She will use straight-line depreciation for each of the 5 years (annual depreciation is $3400 for project A and $8,000 for project B).

Taxes are 21%. Assume she has a 10% discount rate if she takes project A and a 15% discount rate if she takes project B,

calculate the:

NPV?

IRR?

PI ratio?

Payback period?

Assuming that the projects are mutually exclusive, which if any should she do? Briefly explain why.

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