The HalloweenIsPasse Company has the opportunity to invest in one of two mutuall

Question

The HalloweenIsPasse Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the next 8 years. Machine A costs $10 million but would provide cash inflows of $4 million per year for 4 years. If Machine A were replaced, its cost would be $12 million due to inflation, and its cash inflows would increase to $4.2 million due to production efficiencies. Machine B costs $15 million and would provide cash inflows of $3.5 million per year for 8 years. If the market rate is 10 percent, which machine should be acquired?

Explanation / Answer

Project B is better as the NPV of project B is greater then NPV of proect A

Particulars Year PVF @ 10% Cash Flow A Cash Flow B PV A PV B Cash outflow 0 1 10 15 10 15 Replacement Cost 4 0.683013455 12 0           8.20                -   Present Value oF cash Outflows 22 15         18.20         15.00 Cash Inflow 1 0.909090909 4 3.5           3.64           3.18 Cash Inflow 2 0.826446281 4 3.5           3.31           2.89 Cash Inflow 3 0.751314801 4 3.5           3.01           2.63 Cash Inflow 4 0.683013455 4 3.5           2.73           2.39 Cash Inflow 5 0.620921323 4.2 3.5           2.61           2.17 Cash Inflow 6 0.56447393 4.2 3.5           2.37           1.98 Cash Inflow 7 0.513158118 4.2 3.5           2.16           1.80 Cash Inflow 8 0.46650738 4.2 3.5           1.96           1.63 Present value of cash outflows 32.8 28         21.77         18.67 Net Present Value           3.58           3.67

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