The Hospital must choose between two cDNA microarray machines to expand their high-throughput genomic laboratory. Both of these machines have the same function, and the firm will only choose on vendor from which to purchase their machines.
The first machine, manufactured by Amersham Pharmacia (machine 1), will cost $350,000. The second machine, manufactured by PE Applied Biosystems (machine 2), will cost $300,000.
The cost of capital for both of these investments is 9.5%. The life for both machines is estimated to be 5 years. During this period, cash flows for machine 1 will be $17,000 per year and cash flows for machine 2 will be $8,000 per year. These cash flows include depreciation expenses. You have requested calculations for NPV and IRR for each machine. The results are conflicting. However, you must select the best choice for the Hospital. Explain how you made your decision.
Machine 1 Machine 2 Cost of Capital is 9.5% for 5 years
350,000 300,000
17,000 8,000
NPV: 284,724.95 269,282.82
IRR: 34.04% 43.45%