The MAVI Company is considering investing in a new machine for one of its factories. The company can choose either MAchine A or Machine B. The life span for each machine is 5 years, and depreciation is straight-line to zero salvage value. The widgets produced by the machines are sold for $6 each. The company has a cost of capital of 12%, and its tax rate is 35%.

PART A. If the company manufactures 1,000,000 units per year, which machine should it buy?

MAVI WIDGET COMPANY \begin{tabular}{|l|r|} \hline Cost of capital & 12% \\ \hline Tax rate & 35% \\ \hline Widget sales price/unit & 6.00 \\ \hline \end{tabular} \begin{tabular}{|l|r|r|} \hline & Machine A & Machine B \\ \hline Cost & 4,000,000 & 10,000,000 \\ \hline Annual fixed cost & 300,000 & 210,000 \\ \hline Variable cost per widget & 1.20 & 0.80 \\ \hline Life span (years) & 5 & 5 \\ \hline \end{tabular} Annual depreciation Cash flow, annual Production Revenue Fixed cost Variable cost Depreciation Profit before taxes Add back depreciation Cash flow NPV for 5 years Decision