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2. After graduating UD with a major in finance, you have developed a brilliant new widget. You sell your widgets for $6. You need to buy a machine to produce your widgets. You are considering two machines: (6 points) Machine A: Cost $2,000,000 Annual fixed cost per machine: $250,000, Vanable cost per unit $1.40 Annual production capacity: 300,00 widgets (ie.. you cannot produce more than 300,000 widgets) Market life = 5 years, terminal value=0 Machine B: Cost $6,000,000 Annual fixed cost per machine: $25,000, Variable cost per unit $0.40 Annual production capacity: 600,00 widgets Market life = 5 years, terminal value = $200,000 Additional Details: . You have already had an inspector evaluate Machine A for $2,000,000 and Machine B for $6,000,000 . Both machines can be depreciated using straight-line depreciation over a 5-year period. Book value should at the end of 5 years. The tax rate is 30% If Net Income is negative, assume a tax of Ofi.e.the government will not pay you if you lose money, and there are no tax-loss carry fo forwards) The discount rate is 6% You expect to sell 400,000 widgets (if you are able to produce that many) Assume you can only buy one machine Compute the NPV and IRR of both projects. Which praject should you take according to the NPV nale? Which project should you take according to the IRR rule? (2 point) Based on your answer to question and explain which project you should take. If your NPV and IRR rule give different rankings, explain why they give different rankings [you answer should relate specifically to this example), and why you chose one criteria over the other. (0.5 points) c. Compare the differential NPV of Machine Band Machine A as the number of widgets produced varies from 200,000 to 700,000 in increments of 100,000. (1 points) d. Intuitively explain why the differential is so sensitive to level of widget production. Your explanation should include two factors. (0.5 points) 2. After graduating UD with a major in finance, you have developed a brilliant new widget. You sell your widgets for $6. You need to buy a machine to produce your widgets. You are considering two machines: (6 points) Machine A: Cost $2,000,000 Annual fixed cost per machine: $250,000, Vanable cost per unit $1.40 Annual production capacity: 300,00 widgets (ie.. you cannot produce more than 300,000 widgets) Market life = 5 years, terminal value=0 Machine B: Cost $6,000,000 Annual fixed cost per machine: $25,000, Variable cost per unit $0.40 Annual production capacity: 600,00 widgets Market life = 5 years, terminal value = $200,000 Additional Details: . You have already had an inspector evaluate Machine A for $2,000,000 and Machine B for $6,000,000 . Both machines can be depreciated using straight-line depreciation over a 5-year period. Book value should at the end of 5 years. The tax rate is 30% If Net Income is negative, assume a tax of Ofi.e.the government will not pay you if you lose money, and there are no tax-loss carry fo forwards) The discount rate is 6% You expect to sell 400,000 widgets (if you are able to produce that many) Assume you can only buy one machine Compute the NPV and IRR of both projects. Which praject should you take according to the NPV nale? Which project should you take according to the IRR rule? (2 point) Based on your answer to question and explain which project you should take. If your NPV and IRR rule give different rankings, explain why they give different rankings [you answer should relate specifically to this example), and why you chose one criteria over the other. (0.5 points) c. Compare the differential NPV of Machine Band Machine A as the number of widgets produced varies from 200,000 to 700,000 in increments of 100,000. (1 points) d. Intuitively explain why the differential is so sensitive to level of widget production. Your explanation should include two factors. (0.5 points)

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