Question

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:

E) Only Machine B is acceptable

Explanation:

The computation is shown below;

For Machine A      

Year     Cash Flow     PV Factor     PV of Cash Flow  

0          -$9,000               1              -$9,000    

1            $5,000          0.8696         $4,348    

2           $4,000            0.761            $3,044    

3            $2,000           0.6575       $1,315    

NPV                                                 -$293    

Machine B      

Year      Cash Flow      PV Factor       PV of Cash Flow  

0          -$9000                    1               -$9,000    

1            $1,000                  0.8696       $869.6    

2           $2,000                  0.761          $1,522    

3            $11,000                 0.6575       $7,232.5    

NPV                                                         $624.1  

As we can see that from the above calculations that the npv for machine A is in negative so the same should not be accepted but for machine the npv is in positive so the same should be accepted