Answer:
c. Mars should invest in Machine B becuase the net present value of Machine A after 4 years is lower than the net present value of Machine B after 4 years.
Explanation:
Net present value is the present value of after tax cash flows from an investment less the amount invested.
Considering that machine b can be sold on 4 years, The NPV of machine b should be calculated based on the cash flow in for 4 years
NPV can be calculated using a financial calculator.
Machine A :
Cash flow in year 0 = $-200,000
Cash flow each year from year 1 to 4 = $70,000
I = 10%
NPV = 21,890.58
Machine B :
Cash flow in year 0 = $-200,000
Cash flow each year from year 1 = $80,000
Cash flow each year from year 2 = $70,000
Cash flow each year from year 3 = $60,000
Cash flow each year from year 4 = $40000 + $35,000 = $75,000
I = 10%
NPV = $26,883.41
Machine b should be accepted because its NPV is greater than that of machine A
To find the NPV using a financial calacutor:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
I hope my answer helps you
