Mario\'s Incorporated is in the process of selecting a production machine betwee

Question

Mario's Incorporated is in the process of selecting a production machine between two alternatives. Mario's cost of capital is 10%.

...................................................Machine ABC...............Machine XYZ

Cost...............................................$260000........................$200000

Salvage value...................................$10000.............................$0

Estimated life.....................................5 years........................5 years

ANNUAL NET INCOME............................$5000..........................$9000

Instructions:

a. What is the annual rate of return for each machine? (Round to one decimal)

b. What is the payback period for each machine? (Round to two decimals)

c. What is the net present value for each machine? (Round to zero decimals)

Explanation / Answer

payback=initial investment/annual cash inflow

ABC XYZ

250000/5000=50 200000/9000=22

NPV

INFLOW=5000*3.79=18950 9000*3.79=34110

Present value of salvage=10000*0.621=6210

PVF=.909+0.826+0.751+0.683+0.621=3.79

outflow=260000 outflow=200000

NPV=present value of inflow-initial investment

NPV=(18950+6210)-260000=-234840 NPV=34110-200000=-165890   

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