The production department is proposing the purchase of an automatic insertion ma

Question

The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines and have asked the accountant to analyze them to determine which of the proposals (if any) meet or exceed the company's policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has an estimated useful life of 10 years. The accountant has Identified the following data: Which of the investments are acceptable Machines B & C Machines A & C Machine B only Machine A only

Explanation / Answer

Statement showing computations Particulars Machine A Machine B Machine C Present Value of future Cash Flows computed using 10% rate of return         305,000.00         295,000.00         300,000.00 Amount of initial Investment         300,000.00         300,000.00         300,000.00 NPV = Presnt value of cash flows - Initial Investment              5,000.00            (5,000.00)                           -   Machine A only We would be indifferent about Machine C since NPV is 0 but given the choices we would select Machine A since NPV is greater than 0

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