Marvel Company is considering the acquisition of two machines. Machine A Machine

Question

Marvel Company is considering the acquisition of two machines.

                        Machine A Machine B

Initial investment $200,000 $200,000

Annual operating revenues (end of year) $100,000 $160,000

Annual expenses (end of year) $25,000 $85,000

Terminal salvage value $10,000 $20,000

Estimated useful life 5 years 5 years

Minimum desired rate of return 14% 14%

Assume straight-line depreciation. Ignore income taxes. The present value of an ordinary annuity of one at 14% and 5 periods is 3.4331. The present value of one at 14% and 5 periods is 0.5194.

A) Calculate the net present value for both machines.

Explanation / Answer

Machine A Machine B Initial Investment 200000 200000 Annual Operating Revenues 100000 160000 Annual Expenses 25000 85000 Profit 75000 75000 Present Value of Annuity 3.4331 3.4331 Present value of annual Cash Flow 257482.5 257482.5 Present value Factor @14% for 5 years 0.5194 0.5194 Present value of Initial Investment 103880 103880 Net present value of Machine 361362.5 361362.5

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