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TLT Ltd is considering the purchase of a new machine for use in its production process. Management has developed three alternative proposals to help evaluate

TLT Ltd is considering the purchase of a new machine for use in its production process. Management has developed three alternative proposals to help evaluate the machine purchase. Only one of these proposals can be implemented.

Proposals A and B both have the same cost to set up, but the output from proposal A (as measured by future net cash flows) commences at a high rate and then declines over time, while Proposal B starts at a low rate and then increases over time. Proposal C involves buying two of the machines considered under proposal B. That is, proposal C is simply Proposal B scaled by a factor of two. Proposal C results in net cash flows which are similar in magnitude to proposal As net cash flows in the first two years.

The estimated net cash flows, internal rates of return and net present values at 9% and 11% for each proposal are given in the following table.

Sketch the NPV profile for proposals A, B and C. Assume a linear relation between net present value and the discount rate (that is, use straight lines to connect the coordinates on the x and y axes). Mark all the relevant crossover point(s) on your sketch.

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