The Mit Whitehead Institute Must Choose Between Two CDNA Mic

The Mit Whitehead Institute Must Choose Between Two Cdna Microarray Ma

The MIT Whitehead Institute must select between two cDNA microarray machines to enhance its genomic research capabilities. Both machines serve identical functions, with the first manufactured by Amersham Pharmacia (Machine 1) costing $350,000 and the second by PE Applied Biosystems (Machine 2) costing $300,000. The firm's cost of capital is 9.5%, and both have an estimated lifespan of five years. Annual cash flows, including depreciation, are $17,000 for Machine 1 and $8,000 for Machine 2. To determine the optimal choice, calculate the net present value (NPV) of each machine and compare their profitability over five years, aiding the institute in making an economically sound decision.

Paper For Above instruction

The evaluation of capital investment projects, such as acquiring microarray machines, is crucial for research institutions like the MIT Whitehead Institute. The primary financial metric used in such decisions is the Net Present Value (NPV), which measures the difference between the present value of cash inflows and outflows over the project's lifespan. A positive NPV indicates that the project is expected to generate value exceeding its cost, making it a favorable investment. Conversely, a negative NPV suggests that the project may not be financially viable. Hence, careful calculation of NPV for each machine allows the institute to select the most cost-effective option that aligns with its budget and strategic goals.

The two machine options differ mainly in their initial costs and annual cash flows. Machine 1, costing $350,000 with annual cash flows of $17,000, and Machine 2, costing $300,000 with annual cash flows of $8,000, both have a lifespan of five years. The discount rate, reflecting the firm's cost of capital, is 9.5%. To evaluate each, the formula for NPV is applied:

NPV = (Cash Flow / (1 + r)^t) - Initial Investment

where r is the discount rate (9.5%) and t is the year (1 through 5). The process involves calculating the present value of the summed cash flows over five years, then subtracting the initial cost to determine the net value generated by each investment.

For Machine 1, the present value of cash flows is calculated as follows:

PV of cash flows = \(\sum_{t=1}^5 \frac{17,000}{(1 + 0.095)^t}\)

Using the Present Value of Annuity formula:

PV = Cash Flow \(\times\) \(\frac{1 - (1 + r)^{-n}}{r}\)

PV = 17,000 \(\times\) \(\frac{1 - (1 + 0.095)^{-5}}{0.095}\)

PV ≈ 17,000 \(\times\) 4.3295 ≈ $73,701.50

NPV for Machine 1 = $73,701.50 - $350,000 ≈ -$276,298.50

Similarly, for Machine 2:

PV = 8,000 \(\times\) \(\frac{1 - (1 + 0.095)^{-5}}{0.095}\) ≈ 8,000 \(\times\) 4.3295 ≈ $34,635.60

NPV for Machine 2 = $34,635.60 - $300,000 ≈ -$265,364.40

Both NPVs are negative, indicating that neither investment is financially profitable under current assumptions. However, Machine 2 has a less negative NPV, meaning it costs less relative to its cash flows, making it the preferable choice given the scenario.

In real-world decision-making, the institute might consider non-financial factors such as machine reliability, technological compatibility, or strategic importance. Nonetheless, based solely on NPV calculations, Machine 2 provides a relatively better investment opportunity, aligning with principles of maximizing value and efficient resource allocation (Brealey, Myers, & Allen, 2019).

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