6. Justin Manufacturing is considering purchasing two machines. Each machine cos
ID: 2530417 • Letter: 6
Question
6. Justin Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: Machine A Machine B End of Year $5,000 $4,000 $3,000 $1,000 $2,000 $12,000 Justin Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Justin purchase and why? Hint: This is a two-part question. Part 1. Make sure you calculate the NPV for both machines and Part 2. Which machine should the company invest in and why? (3 points) Respond to both parts of this problem on the next page.Explanation / Answer
Ans; Part-1 Calculation of Net present value
Machine A
year
Present value factor @15%
Net Cash flows($)
Present value($) of Net cash flows
0
1
-9000
-9000
1
0.8696
5000
4348
2
0.7561
4000
3024.4
3
0.6575
3000
1972.5
Net Present Value
344.9
Machine B
year
Present value factor @15%
Net Cash flows($)
Present value($) of Net cash flows
0
1
-9000
-9000
1
0.8696
1000
869.6
2
0.7561
2000
1512.2
3
0.6575
12000
7890
Net present value
1271.8
Part-2
Machine B should be purchased as Net present value is higher in case of Machine B. Investment to be made are same in both machine
Machine A
year
Present value factor @15%
Net Cash flows($)
Present value($) of Net cash flows
0
1
-9000
-9000
1
0.8696
5000
4348
2
0.7561
4000
3024.4
3
0.6575
3000
1972.5
Net Present Value
344.9
Machine B
year
Present value factor @15%
Net Cash flows($)
Present value($) of Net cash flows
0
1
-9000
-9000
1
0.8696
1000
869.6
2
0.7561
2000
1512.2
3
0.6575
12000
7890
Net present value
1271.8
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