You own a furniture manufacturing company. You are looking to expand into glass furniture and need to buy new manufacturing equipment to manufacture this type of furniture. You have researched many suppliers but have found that two machines will best suit your needs. The cost of machine 1 is $90,000, and the cost of machine 2 is $110,000. The estimated net profits the machines will generate are in the following table:
Net Profit |
Machine 1 (cost $90,000) |
Machine 2 (cost $110,000) |
Year 1 |
$20,000 |
$10,000 |
Year 2 |
$30,000 |
$20,000 |
Year 3 |
$40,000 |
$40,000 |
Year 4 |
$20,000 |
$60,000 |
Year 5 |
$20,000 |
$50,000 |
Total |
$130,000 |
$180,000 |
Computation of ARR:
Machine 2 can be purchased as it has the higher ARR of 32.73%.
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