Tim Smunt has been asked to evaluate two machines. After some? investigation, he
ID: 357968 • Letter: T
Question
Tim Smunt has been asked to evaluate two machines. After some? investigation, he determines that they have the costs shown in the following? table:?????????????????????????????????????????????????????????????????????????????????????????????
Machine A
Machine B
Original Cost
$10,000
$20,000
Labor per year
$2,400
$4,000
Maintenance per year
$4,600
$800
Salvage value
$2,400
$7,000
He is told to assume? that:
1. The life of each machine is 3 years.
2. The company thinks it knows how to make 12?% on investments no more risky than this one.
3. Labor and maintenance are paid at the end of the year.
The NPV for Machine A =?$__________
?(round your response to the nearest whole number and include a minus sign if? necessary).
Machine A
Machine B
Original Cost
$10,000
$20,000
Labor per year
$2,400
$4,000
Maintenance per year
$4,600
$800
Salvage value
$2,400
$7,000
Explanation / Answer
interest rate/ discount rate (R) = 12%
Machine A:
initial investment (I) = 10000
labor per year = 2400
maintenance per year = 4600
total cost per year = 2400 + 4600 = 7000
cost for year 1 = 7000
cost for year 2 = 7000
cost for year 3 = 7000 - salvage value = 7000 - 2400 = 4600
NPV = (C for Period 1 / (1 + R)1) + (C for Period 2 / (1 + R)2) ... (C for Period x / (1 + R)x) - Initial Investment
NPV = cost for year 1/(1+R) + cost for year 2/(1 + R)2 + cost of year 3/(1 + R)3 - I
NPV = - 7000/(1+12%) - 7000/(1+12%)2 - 4600/(1+12%)3 - 2400
NPV = -6250 - 5580 - 3274 - 2400
NPV = -17504
NPV for machine A = -17504