Problem-
Flowton enjoys a steady demand for stainless steel infiltrators used in a number of chemical processes. Revenues from the infiltrator division are $50 million a year and production costs are $47.50 million. However, the 10 high-precision stamping machines that are used in the production process are coming to the end of their useful life. Option A is to replace each existing machine with a new one. These machines would cost $800,000 each and not involve any addition operating costs. Option B is to buy 10 centrally controlled stampers. This will cost $1.25 million each, but compare to Option A, this would produce a total saving in operator and material cost of $500,000 a year. The stampers of option B are sturdily built and would last 10 years, compared with an estimated 7-year life for the stamping machine of option A. The discount rate is assumed to be 15% per annum for options A and B.
a) Compute the cash-flow tables for Options A and B.
b) Calculate the Net Present Values (NPV), Payback periods and the Internal Rate of returns (IRR) for these two options.
c) Based on your answers in 1 b), explain which options would you recommend to Flowton?