For Metalcrafters Inc., the first thing I would do is to decide whether or not each alternative is mutually exclusive or independent. In this case, the stamping press alternatives are mutually exclusive, the extrusion press alternatives are mutually exclusive, and the new parts orders are mutually exclusive.
Beginning with the stamping press, the next thing I would do is figure out what the expected useful life is for each alternative. Because the SX-65 has a useful life of 5 years and the MD-40 has a life of 10 years, I would expand the life horizon of the SX-65 from 5 years to 10 years so that the two alternatives are comparable. Once the stamping press alternatives are easily comparable to one another, I would calculate the net present value of each press using the annual savings as the cash flows. In order to figure out what the proper cash flows are, I would find the depreciation of the machine for each year using the MACRS table and subtract it from the yearly cash flow (cash savings). I would then multiply the resulting number by (1 – tax rate), and add back the depreciation to the cash flow after taxes.
A better method than NPV to use for unequal lives is the equivalent annuity method. Instead of extending the useful life of SX-65, I could calculate the NPV of both the SX-65 and the MD-40, and then calculate the equivalent annuity for each press using it’s corresponding NPV. Since the extrusion press alternatives both have the same useful life, I am able to calculate the NPV based off of the numbers given in the report, taking into account the costs associated with each alternative. In each case, the taxes must be calculated and compared to the 15% after-tax required rate of return.
After the NPVs of both the stamping press and the extrusion press alternatives are known, I will calculate the internal rate of return (IRR) for each press by setting the initial cost, and cash flows discounted at the IRR (to be calculated through the equation)...
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