MKM International is seeking to purchase a new CNC machine in order to reduce costs. Two alternative machines are in consideration. Machine 1 costs $450,000, but yields a 15 percent savings over the current machine used. Machine 2 costs $800,000, but yields a 25 percent savings over the current machine used. In order to meet demand, the following forecasted cost information for the current machine is also provided. LOADING... Year Project Cost 1 1,000,000 2 1,350,000 3 1,450,000 4 1,550,000 5 2,550,000 a. Based on the NPV of the cash flows for these 5 years, which machine should MKM International purchase? Assume a discount rate of 12 percent. Assuming a discount rate of 12 percent, MKM International should purchase ▼ machine 1 or machine 2 because the NPV of machine 1 is $------ and the NPV of machine 2 is $--------. (Enter your responses rounded to the nearest whole number.) b. If MKM International lowered its required discount rate to 9 percent, what machine would it purchase? Assuming a discount rate of 9 percent, MKM International should purchase ▼ machine 2 machine 1 because the NPV of machine 1 is $-------- and the NPV of machine 2 is $------- (Enter your responses rounded to the nearest whole number.)

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 5MAD: Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to...

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MKM International is seeking to purchase a new CNC machine in order to reduce costs. Two alternative machines are in consideration. Machine 1 costs

$450,000,

but yields a 15 percent savings over the current machine used. Machine 2 costs

$800,000,

but yields a 25 percent savings over the current machine used. In order to meet demand, the following forecasted cost information for the current machine is also provided.

Year	Project Cost
1	1,000,000
2	1,350,000
3	1,450,000
4	1,550,000
5	2,550,000

a. Based on the NPV of the cash flows for these 5 years, which machine should MKM International purchase? Assume a discount rate of

percent.

Assuming a discount rate of

percent, MKM International should purchase

▼

machine 1

machine 2

because the NPV of machine 1 is

$------

and the NPV of machine 2 is

$--------.

(Enter your responses rounded to the nearest whole number.)

b. If MKM International lowered its required discount rate to

percent, what machine would it purchase?

Assuming a discount rate of

percent, MKM International should purchase

▼

machine 2

machine 1

because the NPV of machine 1 is

$--------

and the NPV of machine 2 is

$-------

(Enter your responses rounded to the nearest whole number.)

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