Question

Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows:

Answer 1

Answer:

B) Only Machine A is acceptable.

Explanation:

NPV of Machine A =  $9,000 - ($5,000 * 0.8696) - ($4,000 * 0.7561) - ($2,000 * 0.6575) = $312.60

NPV of Machine B =  $9,000 - ($1,000 * 0.8696) - ($2,000 * 0.7561) - ($11,000 * 0.6575) = - $614.30

Since Machine B NPV is negative at minus $614.30, Machine B is therefore not acceptable. Only Machine A is acceptable because it has a positive MPV of $312.60.

The correct option is therefore B) Only Machine A is acceptable.