A company is considering several mutually exclusive ways that can meet a requirement for a filling machine for its creamer line. One choice is to buy a machine. This would cost $75 000 and last for six years with a salvage value of $12 000. Alternatively, it could contract with a packaging supplier to get a machine free. In this case, the extra costs for packaging supplies would amount to $17 500 per year over the six-year life (after which the supplier gets the machine back with no salvage value for the company). The third alternative is to buy a used machine for $40 000 with zero salvage value after six years. The used machine has extra maintenance costs of $3500 in the first year, increasing by $2500 per year. In all cases, there are installation costs of $8000 and revenues of $25 000 per year. a) Using the IRR method, determine which is the best alternative. The MARR is 10 percent.
A company is considering several mutually exclusive ways that can meet a requirement for a filling machine for its creamer line. One choice is to buy a machine. This would cost $75 000 and last for six years with a salvage value of $12 000. Alternatively, it could contract with a packaging supplier to get a machine free. In this case, the extra costs for packaging supplies would amount to $17 500 per year over the six-year life (after which the supplier gets the machine back with no salvage value for the company). The third alternative is to buy a used machine for $40 000 with zero salvage value after six years. The used machine has extra maintenance costs of $3500 in the first year, increasing by $2500 per year. In all cases, there are installation costs of $8000 and revenues of $25 000 per year. a) Using the IRR method, determine which is the best alternative. The MARR is 10 percent.
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