Present Value Calculation - Tao Company The Tao Company is considering the purch
ID: 2751393 • Letter: P
Question
Present Value Calculation - Tao Company
The Tao Company is considering the purchase of two machines. It would like ot purchase both machines, but only has the funds to purchase one of the machines. Relevant data is given below:
The company's minimum requried rate of return is 5%. An excerpt from a present value table is present below:
Present Value of an Annuity of $1
REQUIRED: Compute the present value of each machine. Which machine should Tao Company puchase, Kuan or Yin? Why? (round your answer to the nearest dollar.)
Kuan Yin Initial cost $60,000 $275,000 Annual cost inflows $33,000 $90,000 Annual cost outflows $17,000 $40,000 Estimated useful life 7 Years 7 YearsExplanation / Answer
discounted cf = CF/discount factor
Company should choose project Kuan as it has greater NPV than YIN
Required rate 5.000% Year 0 1 2 3 4 5 6 7 Project Kuan -60000 16000 16000 16000 16000 16000 16000 16000 Project YIN -275000 50000 50000 50000 50000 50000 50000 50000 Discounting factor Kuan 1 1.05 1.1025 1.157625 1.215506 1.276282 1.340096 1.407100423 Discounting factor YIN 1 1.05 1.1025 1.157625 1.215506 1.276282 1.340096 1.407100423 Discounted cash flows project Kuan -60000 15238.1 14512.47 13821.4 13163.24 12536.42 11939.45 11370.90128 Discounted cash flows project YIN -275000 47619.05 45351.47 43191.88 41135.12 39176.31 37310.77 35534.06651 NPV = Sum of discounted cash flows NPV Kuan = 32581.97 NPV YIN = 14318.67