Albert Shoe Company is considering investing in one of two machines that attach
ID: 2445237 • Letter: A
Question
Albert Shoe Company is considering investing in one of two machines that attach heels to shoes. Machine A costs $69,030 and is expected to save the company $20,250 per year for six years. Machine B costs $95,960 and is expected to save the company $25,250 per year for six years.
Determine the net present value for each machine if the required rate of return is 12 percent. (Ignore taxes.) (Round present value factor calculations to 4 decimal places, e.g. 1.2151 and final answer to 0 decimal places, e.g. 125. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Net present value
Machine A $=
Machine B $=
Explanation / Answer
Machine A Machine B Initial Investment 69030 95960 R = Net cash inflow 20250 25250 ;i= rate of return = 12% 0.12 0.12 n = number of period (years) 6 6 NPV = R * ( 1 - ( 1+ i)-n/ i - Initial investment R = is the net cash inflow expected to be received in each period i = required rate of return n = number of periods during which the project is expected to operate NPV of Machine A = 20250 * ( 1-( 1+0.12)-6) / 0.12 - 69030 = 20250 * ( 1 - ( 1+ 0.12)-6 ) /0.12 - 69030 = 20250 * ( 1 - ( 1.12)-6 ) /0.12 - 69030 = 20250 * ( 1 -0.5066) / 0.12 - 69030 = 20250 * 0.4934 / 0.12 - 69030 = 20250 * 4.1112 - 69030 = 83251.8 - 69030 = 14221.80 = 14222 NPV of Machine B = 25250 * ( 1-( 1+0.12)-6) / 0.12 - 95960 = 25250 * ( 1 - ( 1+ 0.12)-6 ) /0.12 - 95960 = 25250 * ( 1 - ( 1.12)-6 ) /0.12 - 95960 = 25250 * ( 1 -0.5066) / 0.12 - 95960 = 25250 * 0.4934 / 0.12 - 95960 = 25250 * 4.1112 - 95960 = 25250 * 4.1112 - 95960 = 103807.8 - 95960 = 7847.80 = 7848 Hence NPV of Machine A =$ 14222 Machine B = $7848
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