Albert Shoe Company is considering investing in one of two machines that attach

Question

Albert Shoe Company is considering investing in one of two machines that attach heels to shoes. Machine A costs $69,420 and is expected to save the company $20,140 per year for six years. Machine B costs $95,590 and is expected to save the company $25,140 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).)

Decide which machine should be purchased.

Explanation / Answer

Npv= PV of all cash inflow - initial investment

Npv of;

Machine A=20140[(1-(1+.12 )^-6)/.12] - 69420

=20140(4.11141)-69420

=13384

Machine B=25140[(1-(1+.12 )^-6)/.12] - 95590

=25140(4.11141)-95590

=7771

Both machine can be selected as both are giving positive NPV but if one to select than machine A should be selected as it is giving more NPV.

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