A has a life of 11 3. years, and the NPV revenues minus costs for each vear of o

Question

A has a life of 11 3. years, and the NPV revenues minus costs for each vear of operation) has been estimated to be 53.2 Machine B has a life of 13 years, and the NPV of its net cash flows (again taking into account the cost of the machine and revenues minus costs for each year of operauion been estimated to be $3.33 million. The discount rate that takes the risk of the cash flows into account has been estimated to be 15%. Suppose you have to decide between two machines. Machine of its net cash flows (taking into account the cost of the machine and (). Which machine would you prefer if this were a one-time project? (ii). Which machine would you prefer if this were an ongoing project so that one or (2 points) the other of these machines would be needed on an ongoing basis?

Explanation / Answer

(i) if this is a one time project, then obviously we will undertake the machine with greater NPV. Therefore, we will choose machine B.

(ii) if this is an ongoing process, then we need to look for life and NPV. Here, both life and NPV of machine B is higher than that of machine A, therefore, we will choose Machine B here also.

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