As a financial analyst at CPW International, you are evaluating an option to pur

Question

As a financial analyst at CPW International, you are evaluating an option to purchase an equipment to expand the product line for the company. There are two machines meeting the company's investment criteria. Machine H and Machine L. Machine H costs more than Machine L but has the flexibility to be modified if the demand for product is low while machine L cannot be modified. The following is the financial information about these two machines. The project with Machine L is worth $30 million today and will be $40 million one year from today with high demand and $20 million with low demand. Machine H costs $4 million more but can be modified and sold off for $25 mi/lion if the demand is low. Is Machine H is worth more than 54 million in value than machine B? (Assume 10% of interest rate. Please show your work)

Explanation / Answer

The value of Machine H after one year with   high demand id not available. So we shall   consider the value with low demand. Amounts in $ Million Machine H Machine L Differential Current Cost                          34                   30                          4 Value after one year in Low demand situation=                        20                   25                          5 PV of difference in value after one year in Low demand=5/1.10=                  4.545 So Machine H is woth > 4 million in PV terms even in low demand situation

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