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Question - Pheonix Co. wants to buy a machine to automate is manufacturing process at a cost of $616 ,000. The machine will be integrated into its existing manufacturing process. The investment is expected to generate $250,000 annual cash ?ows for a period of four years. The required rate of return is 14%. The machine is expected to have $35,000 at the end of the four-year period.
Required -
(a) What is the net present value of the investment? Would the company purchase the new machine?
(b) Would your answer of part (a) be different if there is a cut-off period of 2 years for Pheonix Co. to adopt any project? Explain.
(c) Ignore part (b). It has received three proposals ?'om suppliers for the machine purchase. The proposals range from $650,000 to $750,000. The annual savings of the machines range from $250,000 to $300,000. The payback periods are close and the NPV are all witth $80,000 of each other. Suggest to the company two non-quantitative factors it has to consider while evaluating the proposals.
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