PART 1

Compare the two scenarios for acquiring a machine for a project for 25 years expected operations, at a company with an internal rate of return of i = 10%. Which scenario is better? Please round to the nearest $.

Scenario 1. Buy an initial small machine at $12,000, it cost $2,400 to run for the first 10 years, buy a second larger machine at $28,000 and run it for 15 years at a cost of $4,000/year. There is no salvage value at the end of service for either machine.

Scenario 2. Buy a large machine for $30,000 and run it for 25 years at a cost of $1,000/year. At the end of the 25 years, the machine is assumed to have a salvage value of $12,000.

PART 2

If a sensitivity analysis was performed on scenario 2 machine in part 1 by varying the purchase price, the useful life, the annual cost and the internal rate of return (that is 4 factors) by + 20% each, how many PV calculations you have to make, and how many points you will plot for the sensitivity analysis. (You do not have to do the analysis, just show the numbers).

Number of PV calculations? ___________, Number of points to plot on the sensitivity curve?