Question 32 1 pts You are considering two machines, A and B that can be used for
ID: 2617669 • Letter: Q
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Question 32 1 pts You are considering two machines, A and B that can be used for the same purpose. Machine A costs $250,000, will reduce costs by $70,000 per year, needs net working capital of $20,000 at time zero which be released at the end of the project, has a 5 year straight line depreciable life and can be sold at the end of the project's life for $50,000. Machine B costs $320,000, will reduce costs by the same $70,000 per year, has net working capital of $40,000 at time zero (also released at the end of its life), has a ten year straight line depreciable life and can be sold at the end of its life for $60,000. Assume that the tax rate is 34% and the discount rate is 10%, what are the net present values for these two projects? O $2,486.55 for A and $21,421.13 for B O $7,045.82 for A and $39,542.1 for E $3,704.49 for A and $24,333.2 for B $10,933.40 for A and $69,726.4 for BExplanation / Answer
Project A:
Initial investment = 250,000 + 20,000 = 270,000
Annual depreciation = 250,000 / 5 = 50,000
Operating cash flow from year 1 to year 5 = [ 70,000 - 50,000]( 1 - 0.34) + 50,000
Operating cash flow from year 1 to year 5 = 63,200
Year 5 non-operating cash flow = salvage value + net working capital - tax(salvage value - book va;ue)
Year 5 non-operating cash flow = 50,000 + 20,000 - 0.34( 50,000 - 0)
Year 5 non-operating cash flow = 50,000 + 20,000 -17,000
Year 5 non-operating cash flow = 53,000
Total year 5 cash flow = 53,000 + 63,200 = 116,200
NPV = present value of cash inflows - present value of cash outflows
NPV = -270,000 + 63,200 / ( 1 + 0.1)1 + 63,200 / ( 1 + 0.1)2 + 63,200 / ( 1 + 0.1)3 + 63,200 / ( 1 + 0.1)4 + 116,200 / ( 1 + 0.1)5
NPV = $2,486.55
Since the option first has NPV of 2,486.55
$2,486.55 for A and $21,421.13 for B
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