Use the following information to determine which machine to purchase based on ne

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

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