Answer:
The net present value of each potential investment:
Machine A Machine B
NPV $167,675 $2,267
Explanation:
a) Data and Calculations:
Machine A Machine B
Cost of machine $565,000 $410,000
Incremental after-tax income 165,000 75,000
Salvage value 25,000 26,000
Estimated useful life 6 years 8 years
Required rate of return 10% 10%
Annuity factor 4.355 5.335
PV factor 0.564 0.467
PV of incremental after-tax income $718,575 $400,125
($165,000*4.355) ($75,000*5.335)
PV of salvage value $14,100 $12,142
Total PV of income $732,675 $412,267
NPV $167,675 $2,267
= Total PV of income minus PV of initial investment cost
