Reference no: EM133018325

Question - Lifetime Pet Food produces a vast variety pet food from the highest quality raw materials. Located in St Marys, Ontario, in the middle of Ontario's agricultural belt, the company is ideally located for local ingredient sourcing and distribution throughout Canada and USA.

Lifetime Pet Food is planning on its expansion and is considering the following two projects, as described below. The company's required rate of return on investment in equipment and machinery is 10%.

Project 1: To purchase a new packaging machine for the dog food line. The machine costs $563,000 and is expected to last 5 years. It is estimated to result in the following savings per year: $56,800 hydro costs, $65,450 maintenance costs and $74,630 direct labour costs. The new machine will result in increased indirect material costs of $47,650 per year. At the end of its useful life, the machine will have no salvage value.

Project 2: To purchase a new filling machine for the cat food line. The machine costs $638,000 and is expected to lasts 6 years. The annual savings in operating costs are estimated to be $63,800 hydro costs, $65,200 direct labour and $48,400 maintenance costs. In addition, there is an estimated increase in the indirect material costs of $38,250 per year. The end of its useful life, the filling machine will have a salvage value of $15,000.

Required -

(a) Determine the expected net annual cash flow for the above two projects?

(b) Compute the internal rate of return for both projects. Clearly state the PV factor(s) used.

(c) Which machine should Lifetime Pet Food purchase? Why?