MKM International is seeking to purchase a new CNC machine in order to reduce costs. Two alternative machines are in consideration. Machine 1 costs $500,000 but yields a 15 percent savings over the current machine used. Machine 2 costs $900,000 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.
a. Based on the NPV of the cash flows for these five years, which machine should MKM International Purchase? Assume a discount rate of 12 percent.
b. If MKM International lowered its required discount rate to 8 percent, what machine would it purchase?
