Question

Ashley Foods, Inc. has determined that any one of five machines can be used in one phase of its chili-canning operation. The costs of the machines are estimated, and all machines are expected to have a 4-year useful life.  If the minimum rate of return is 6% per year, which machine should be selected on the basis of a rate of return analysis? The do nothing alternative is not an option.

Machine	First Cost, $	Annual operating cost, $/year
1	-31,000	-16,000
2	-29,000	-19,300
3	-34,500	-17,000
4	-49,000	-12,200
5	-41,000	-15,500

Notes:

• The Do-nothing alternative is not viable, as the company must invest. Your analysis must be an IRR analysis or no credit will be given.

Answer 1