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# You have been negotiating with a customer for several months over th

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You have been negotiating with a customer for several
months over the purchase of a very expensive automatic
filling and packaging system. The purchase price of your
machine is \$1,000,000 plus \$20,000 installation and
training costs. It is expected that your machine will reduce
the packaging cost of your customer\'s operation by
\$100,000 per year, that the machine will have a life of 10
years, and can be resold at the end of the period for
\$550,000.
Your competitor has presented a similar system which has
a purchase price of \$1,100,000, free installation costs, an
annual reduction of the packaging cost of your customer\'s
operation of \$108,000 per year, and can be resold for
\$550,000. Your competitor has argued that his higher
initial price is justified by the \$8,000/month higher savings,
which then makes his net price comparable to yours.
Neither you nor your competitor is offering financing, but
your customer can borrow from his bank at prime rate,
which was recently 5.5% - or pay cash for the equipment at
time of purchase.
comparison of the two proposals, and has indicated that he
would make his decision on that basis, as the systems are
nearly identical.
1. Arrange all of the cash inflows and outflows by proposal
by year
2. Calculate the sums of the cash inflows and outflows for
each project
3. Calculate the PV (DCF) for each project
4. Calculate the NPV for each project
5. Identify the best solution for your customer

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Solution
Financial Comparison of the two Systems:
Particulars
Us (\$)
Competitor (\$)
Purchase Price
1020000
1100000
Interest Rate on the same @ 5.5 % (A)
56100
60500
Depriciation(B) [ Toatal Purchase price- Salvage value /
No. of useful years )
47000(1020000-550000)/10
55000(1100000-550000)/10
Savings (C)
100000
108000
Total gain per year ( c- [ a+b] )
(3100)

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