A manufacturing company is considering the installation of a complex automated piece of machinery. The have...

 

Transcribed Image Text:

A manufacturing company is considering the installation of a complex automated piece of machinery. The have issued a performance specification which incorporates higher production rates after 6 years. They have had firm offers from two companies. Company A has offered to supply and install the infrastructure for a once off amount of $2,324,200. Company B has offered to supply and install smaller piece of equipment for $1,237,500 and then upgrade it to the equipment equivalent to that offered by company A at the end of the 7th year at a firm price of $1,680,100. Either option will meet the requirements. In the case of the offer by Company A, there will be ongoing maintence needed which is estimated to cost $2,750 per month at current prices. In the case of the offer by Company B, there will be ongoing maintence needed which is estimated to cost $1,830 per month at current prices, until the equipment is upgraded. After year 7, the costs will be the same as for Company A. All interest and maintenance costs are payable at the end of each month. Interest will be calculated on the balance each month. Select the interest cost of capital and inflation rates corresponding to the last digit of your student number. For Last Student Number Digit 0, 1, 2, 3 - Cost of capital 10.1% p.a. Inflation 3.1% p.a. (i) Which machine should be purchased now, based on a present value financial analysis? (ii) Are there other factors which might be considered in making this decision? (40 Marks) (10 Marks) A manufacturing company is considering the installation of a complex automated piece of machinery. The have issued a performance specification which incorporates higher production rates after 6 years. They have had firm offers from two companies. Company A has offered to supply and install the infrastructure for a once off amount of $2,324,200. Company B has offered to supply and install smaller piece of equipment for $1,237,500 and then upgrade it to the equipment equivalent to that offered by company A at the end of the 7th year at a firm price of $1,680,100. Either option will meet the requirements. In the case of the offer by Company A, there will be ongoing maintence needed which is estimated to cost $2,750 per month at current prices. In the case of the offer by Company B, there will be ongoing maintence needed which is estimated to cost $1,830 per month at current prices, until the equipment is upgraded. After year 7, the costs will be the same as for Company A. All interest and maintenance costs are payable at the end of each month. Interest will be calculated on the balance each month. Select the interest cost of capital and inflation rates corresponding to the last digit of your student number. For Last Student Number Digit 0, 1, 2, 3 - Cost of capital 10.1% p.a. Inflation 3.1% p.a. (i) Which machine should be purchased now, based on a present value financial analysis? (ii) Are there other factors which might be considered in making this decision? (40 Marks) (10 Marks)

Answer rating: 100% (QA)

Solution 1 To determine which machine should be purchased now we need to perform a present value analysis We will calculate the present value of both ... View the full answer