Name of Student: 01-02 Use the data from the following table, and an interest of
ID: 2577488 • Letter: N
Question
Name of Student: 01-02 Use the data from the following table, and an interest of 10% per year. Initial cost, $ Net Revenue, S/year Salvage value, S Life, years Machine A - 50,000 10,000 25,000 Machine B - 80,000 20,000 10,000 In comparing the machines on a present worth basis, PW for machine B is closest to: A. $ -109,450 B. $-39,850 01. C. $ - 22,750 D. $ 22,750 E. $ 39,850 Formula Used: Which machine should be selected? a. Neither is good 02. b. machine A c. machine B d. Both are equally good Decision criterion:Explanation / Answer
Machine: A
Year
Cash Flow
PV Factor Formula
PV Factor @ 10 %
PV
0
$ (50,000)
1/(1+0.10)^0
1.00000
$ (50,000.00)
1
$ 10,000
1/(1+0.10)^1
0.90909
$ 9,090.91
2
$ 10,000
1/(1+0.10)^2
0.82645
$ 8,264.46
3
$ 10,000
1/(1+0.10)^3
0.75131
$ 7,513.15
4
$ 10,000
1/(1+0.10)^4
0.68301
$ 6,830.13
5
$ 10,000
1/(1+0.10)^5
0.62092
$ 6,209.21
6
$ 35,000
1/(1+0.10)^6
0.56447
$ 19,756.59
NPV
$ 7,664.46
Year 6th cash in-flow = Revenue + salvage = $ 10,000+$ 25,000 = $ 35,000
Machine: B
Year
Cash Flow
PV Factor Formula
PV Factor @ 10 %
PV
0
$ (80,000)
1/(1+0.10)^0
1.00000
$ (80,000.00)
1
$ 20,000
1/(1+0.10)^1
0.90909
$ 18,181.82
2
$ 20,000
1/(1+0.10)^2
0.82645
$ 16,528.93
3
$ 30,000
1/(1+0.10)^3
0.75131
$ 22,539.44
NPV
$ (22,749.81)
Year 3rd cash in-flow = Revenue + salvage = $ 20,000+$ 10,000 = $ 30,000
01.
PW of machine B is $ - 22,749.81 or $ - 22,745.
Hence option “C. $- 22,750” is correct answer.
Formula used: PW(or NPV) = C + CF1/(1+i) + CF2/(1+i)2 + CF3/(1+i)3
02. Machine A should be selected as it has positive PW.
Option “b. Machine A” is correct answer.
Decision Criterion: PW
Year
Cash Flow
PV Factor Formula
PV Factor @ 10 %
PV
0
$ (50,000)
1/(1+0.10)^0
1.00000
$ (50,000.00)
1
$ 10,000
1/(1+0.10)^1
0.90909
$ 9,090.91
2
$ 10,000
1/(1+0.10)^2
0.82645
$ 8,264.46
3
$ 10,000
1/(1+0.10)^3
0.75131
$ 7,513.15
4
$ 10,000
1/(1+0.10)^4
0.68301
$ 6,830.13
5
$ 10,000
1/(1+0.10)^5
0.62092
$ 6,209.21
6
$ 35,000
1/(1+0.10)^6
0.56447
$ 19,756.59
NPV
$ 7,664.46
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