The manager of a canned-food processing plant has two labeling machine options. on the basis of a rate of return analysis with a marr of 20% per year, determine (a) which model is economically better, and (b) if the selection changes, provided both options have a 4-year life and all other estimates remain the same.

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Business

Mayra Wiley

16 January, 04:48

The manager of a canned-food processing plant has two labeling machine options. on the basis of a rate of return analysis with a marr of 20% per year, determine (a) which model is economically better, and (b) if the selection changes, provided both options have a 4-year life and all other estimates remain the same.

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Jaylynn · Answer 1

We need to compare the present values (PV) of all the expenses of all the investments to make an investment decision. The formula of PV = ((C1 / (1+r) 1) + ((C2 / (1+r) 2) + ((C3 / (1+r) 3) + ... + ((Cn / (1+r) n) + present value of investment - present value of the salvage value

Where, Cn refers to the expense incurred in the nth period and r is the rate of interest per period.

For Machine A, present value of the expenses is

= ((1600 / (1+0.20) 1) + ((1600 / (1+0.20) 2) + 15,000 - ((3000 / (1+0.20) 2)

= 1333.33 + 1111.11 + 15000 - 2083.33

= 15361.11

For Machine B, present value of the expenses is

= ((400 / (1+0.20) 1) + ((400 / (1+0.20) 2) + ((400 / (1+0.20) 3) + ((400 / (1+0.20) 4) + 25,000 - ((4000 / (1+0.20) 2)

= 333.33 + 277.77 + 25,000 - 2777.77

= 22833.33

We can see that Machine A is the least cost alternative; therefore, Machine A should be selected.