Question 1. TLC Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below:
Machine A Machine B
Original Cost $78,000 $190,000
Estimated life 8 years 8 years
Salvage value 0 0
Estimated annual cash inflows $20,000 $40,000
Estimated annual cash outflows $ 5,000 $ 9,000
Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. Which machine should be purchased.
Question 2. Kendra Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $425,000. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $95,000 for the next 6 years. Management requires a 10% rate of return on all new investments.
Calculate the internal rate of return on this new machine. Should the investment be accepted?