Jupiter Corp. is choosing between two different capital investment proposals. Ma
ID: 2500583 • Letter: J
Question
Jupiter 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 $200000, 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 $35000.
Machine A will generate net cash flow of $70000 in each of the four years. Machine B will geberate $80000 in year 1, $70000 in year 2, $60000 in year 3, and 40000 per year for the remaining 3 years of its useful life.
Which of the following statement portrays the most accurate analysis between the two proposals?
a. Mars should invest in Machine A becuase the net present value of Machine A after 4 years is higher than the net present value of Machine B after 4 years.
b. Mars should invest in Machine B becuase the net present value of Machine A after 4 years is lower than the net present value of Machine B after 6 years.
c. Mars should invest in Machine B becuase the net present value of Machine A after 4 years is lower than the net present value of Machine B after 4 years.
d. Mars should invest in Machine A becuase the net present value of Machine A after 4 years is higher than the net present value of Machine B after 6 years.
Year present Value of $1 at 10% 1 0.909 2 0.826 3 0.751 4 0.683 5 0.621 6 0.513Explanation / Answer
Suppose , considering an option to sell Machine B at end of 4 years , NPV would be as follows
NPV of Machine B is higher than Machine A in above case .
Also, Machine B generates more NPV if sold after 6 years, however Machine B covers its initial investment within the span of 4 years .
Hence, Answer C should be a appropriate answer for this case.
Year Machine A NPV Machine B NPV 0 200000 200000 1 70000 -63630 80000 -72720 2 70000 -57820 70000 -57820 3 70000 -52570 60000 -45060 4 70000 -47810 75000 -51225 -21830 -26825Related Questions
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