Question

A manufacturer of printed circuit boards is considering purchasing a new surface mount technology component placement system. Two machines are under consideration and the following information is prepared for the economic evaluation. If the company's after-tax MARR of 12% per year and MACRS with a 7-year recovery period is used, determine which alternative is preferred on the basis of their after-tax annual worth. Assume an effective tax of 35% per year. Machine Q R First costs $380,000 $395,000 Net annual revenue $150,000 in year 1, increasing by $500 per year thereafter $152,500 Market value at the end of the useful life $4000 0 Life, years 8 10

Answer 1

R is a better alternative because it has a higher NPV than Q.

Step-by-step explanation:

Machines Q R

First costs $380,000 $395,000

Net annual revenue $150,000 in year 1, $152,500

increasing by $500

per year thereafter

Salvage value $4,000 0

Life, years 8 10

MACRS 7 year recovery:

year % Q R

1 14.29% 54,302 56,445.50

2 24.49% 93,062 96,735.50

3 17.49% 66,462 69,085.50

4 12.49% 47,462 49,335.50

5 8.93% 33,934 35,273.50

6 8.92% 33,896 35,234.00

7 8.93% 33,934 35,273.50

8 4.46% 16,948 17,617.00

net cash flow

year Q R

1 116,505.70 118,880.93

2 130,396.70 132,982.43

3 121,411.70 123,304.93

4 115,086.70 116,392.43

5 110,676.90 111,470.73

6 110,930.10 111,456.90

7 111,326.90 111,470.73

8 108,306.80 105,290.95

9 99,125

10 99,125

Using a financial calculator, I calculated the NPV using a 12% discount rate:

• Q's NPV = $200,636.15
• R's NPV = $259,221.01