The following cash flows represent the potential savings associated with two dif

Question

The following cash flows represent the potential savings associated with two different machines, A and B. Machine A requires an investment of $140,000 and has an expected salvage value of 40,000. Machine B requires an investment of $160,000 and has a salvage value of 60,000. n A 1 60,000 2 50,000 3 40,000 4 30,000 48,000 48,000 48,000 48,000 a. Determine the hourly savings for each machine, assuming 2800 hours of operation per year. Use interest rate of 12%. b. Determine which machine should be selected..(1 point) 4 points)

Explanation / Answer

Ans.

We have used the formulae to calculate NPV which is

NPV= CF /(1+R)^1 + CF /(1+R)^2 + CF /(1+R)^3+ CF /(1+R)^4+ CF /(1+R)^4

From the above analysis it is found that machinery A should be selected since=

Year CF of A CF of B Discount rate PV of future cash flows (A) PV of future cash flows (B) 1 60000 48000 1.12 53571.42857 42857.14286 2 50000 48000 1.12 39859.69388 38265.30612 3 40000 48000 1.12 28471.20991 34165.4519 4 30000 48000 1.12 19065.54235 30504.86776 4 40000 60000 1.12 25420.72314 38131.0847 220000 252000 Net cash flow in PV 166388.5978 183923.8533 26388.59785 23923.85334

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