Question
UCD Manufacturing is planning to buy a new printing machine. They are considering two different machines manufactured by two different companies. The appropriate discount rate
UCD Manufacturing is planning to buy a new printing machine. They are considering two different machines manufactured by two different companies. The appropriate discount rate is 20% . Variables to consider for each project are as follows Machine A - $50,000 cost; functional life of 9 years; expected cash flow of $20,000 per year Machine B - $75,000 cost; Functional life of 7 years; expected cash flow of $30,000 per year; plus a salvage value of $10,000 for the machine in 7 years. Calculate NPV and IRR for each machine. Clue for the Machine B calculation. Salvage Value should be considered as a future payment that needs to be discounted back. In your opinion, which machine should Hokie Manufacturing select ? Salvage value is based on an assumption that Machine B will have a value of $10,000 seven years from now. What variables could impact that assumption?
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