Brandt Corp. is choosing between two different capital investment proposals. Mac

Question

Brandt Corp. is choosing between two different capital investment proposals. Machine A has a useful life of 4 years, and Machine B has a useful life of 6 years. Each proposal requires an initial investment of $200,000, and the company desires a rate of return of 10%. Although Machine B has a useful life of 6 years, it could be sold at the end of 4 years for $35,000. Year Present Value of $1 at 10% 1 0.909
2 0.826 3 0.751 4 0.683 5 0.621 6 0.513 Machine A will generate net cash flow of $70,000 in each of the four years. Machine B will generate $80,000 in year 1, $70,000 in year 2, $60,000 in year 3, and $40,000 per year for the remaining 3 years of its useful life. Which of the following statements portrays the most accurate analysis between the two proposals? a. Brandt should invest in Machine B because the net present value of Machine A after 4 years is lower than the net present value of Machine B after 4 years. b. Brandt should invest in Machine B because the net present value of Machine A after 4 years is lower and the net present value of Machine B after 6 years. c. Brandt should invest in Machine A because the net present value of Machine A after 4 years is higher than the net present value of Machine B after 4 years. d. Brandt should invest in Machine A because the net present value of Machine A after 4 years is higher than the net present value of Machine B after 6 years.

Explanation / Answer

a. Brandt should invest in Machine B because the net present value of Machine A after 4 years is lower than the net present value of Machine B after 4 years.

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