An international textile company’s North America Division must decide which type of fabric cutting machines it will use–a straight knife or a round knife. The estimates are summarized below. Compare them on the basis of annual worths at i = 8%.
| Round Knife | Straight Knife | |
| First Cost | $-200,000 | $-190,000 |
| AOC, per Year | $-38,000 | $-38,000 |
| Overhaul in Year 2 | – | $-14,000 |
| Salvage Value | $38,000 | $17,000 |
| Life | 6 years | 4 years |
The ( a. round knife) (b. straight knife) type of fabric cutting machine will be used by the company.
To understand which Knife should be used we have to find the NPV. Ans whichever NPV will be higher, that will be selected.
NPV of round knife = -200000 - 38000*(1-(1+0.08)^- 6 ) / 0.08 + 38000/ (1+0.08)^6
=-200000 - 171000 +24050
= - 346950
NPV of the stright Knife= - 190000 - 38000*(1-(1+0.08)^- 4 ) / 0.08 - 14000/(1+0.08) ^2 + 17000/ (1+0.08)^4
= -190000 - 123500 - 12006 + 12495
= - 313011
So the cost is less for straight knife so the company should go with this one
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