Please show detail calculations for each question. 1) Marvel Company is consider
ID: 2470246 • Letter: P
Question
Please show detail calculations for each question.
1) 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.
B) Assume there are enough funds to purchase both machines. Should both machines be purchased?
C) Assume there are funds to purchase only one machine. Which machine should be purchased?
Explanation / Answer
Machine A
Annual revenue = $1,00,000
Annual Expenses=$25,000
Net Cash Flow=$75000
Present Value for 5 year = $75000*3.4331
=$257482.50
Present Value of Terminal Cash Flow=$10000*0.5194
=$5194
Total Cash Inflow=$257482.50+$5194
=$262676.50
Initial Cash Outflow=$200,000
NPV=$272676.50-$200,000
NPV=$62676.50
Machine B
Annual Revenue=$1,60,000
Annual Expense=$85,000
Annual Cash Flow= $75000
Present Value of CashFlow= $75000*3.4331
=$257482.50
Terminal salvage Value =$20,000*.5194
=$10388
NPV= $257482.50+$10388-$2,00,000
=$67870
(b) If the funds are available then both machine can be purchased as both the Machine has positive NPV
(c) If there are funds to Purchase only one Machine then Machine B should be purchased as the same has higher NPV.
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