Question

urk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: End of Year Machine A B 1 $ 5,000 $ 1,000 2 4,000 2,000 3 2,000 11,000 Turk Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Turk purchase?

Answer 1

Answer:

Turk should purchase Machine B

Explanation:

Our first step will be to multiply each cashflow by the factor.

Then we will add them to get the present value of the cash flow

$\left[\begin{array}{cccc}-&A&factor&Present \: Value\\Year \: 1&5,000&0.8696&4,348\\Year \: 2&4,000&0.7561&3,024.4\\Year \: 3&2,000&0.6567&1,313.4\\Total&11000&-&8,685.8\\\end{array}\right]$

Then we subtract the machine cost:

8,685.8 - 9,000 = -314.2 This Machine has a negative value. It is not convinient to purchase this machine.

$\left[\begin{array}{cccc}-&B&factor&Present \: Value\\Year \: 1&1,000&0.8696&869.6\\Year \: 2&2,000&0.7561&1,512.2\\Year \: 3&11,000&0.6567&7,223.7\\Total&14,000&-&9,605.5\\\end{array}\right]$

9,605.5 - 9,000 = 605.5 This machine NPV is positive it is convient.