Use the following information to determine which machine to purchase based on ne
ID: 2486423 • Letter: U
Question
Use the following information to determine which machine to purchase based on net present value.
Machine 1 - Initial investment 225,000; Annual cash flows; 50,000 Useful lives; 5 years
Machine 2 - initial investment 235,000; annual cash flows; 50,000 useful lives; 4 years
Machine 3 - initial investment; 210,000; Annual CF; 50,000 Useful lives; 8 years
Cost of Capital is 10%.
A) purchase machine 3
B) purchase machine 2
C) purchase machine 1
D) purchase any of the three machines
E) purchase all three machines
Explanation / Answer
Answer :A) purchase machine 3
Working Notes for the above answer is as under
Calculation of NPV
Machine 3 has positive NPV so purchase Machine 3
Machine 1 Machine 2 Machine 3 Initial Investment 225,000 235,000 210000 Estimated Aftertax Cash flow 50,000 50,000 50,000 Life of the project 5 4 8 Cost of Capital 10% 10% 10% PV factor for 5 year 3.7908 3.1699 5.3349 PV of cash Flow 189540 158495 266745 Prasent Value= PV of Cash Flow-initial Investment -35,460 -76,505 56,745