Demon Priming Inc. must buy a printing machine. The company can choose between t

Question

Demon Priming Inc. must buy a printing machine. The company can choose between two models. Model A costs $ 75.000 and will last three years. At the end of its useful life it is expected to have no salvage value. It will be depreciated to a zero book value over three years using the straight line method. This machine will produce revenues of S 70,000 per year and V expenses of $ 25.000 per year. Model B costs $ 140.000 and will last live years. At the end of its useful life it is expected V have no salvage value. It will be depreciated to a zero book value over live years using the .straight line method. T his machine will produce revenues of S 90.000 per year and have ex of $ 35.000 per year. You may assume that future replacements will he newer models of the same machine. The company cost of capital is 15% and the company's lax rale is 35%. Which machine should be purchased?

Explanation / Answer

NPV OF MODEL A:

70000 - 25000 - (75000/3) = Annual net income $20000 - Tax (20000 * 0.35) = 13000 + Depreciation $25000 = Annual cash flow $38000 * PVIFA(15%,3) i.e. 2.2832 = Present value of future cash flow $86762 - initial investment 75000= NPV $11762 , PER YEAR NPV = 11762/3 = $3920

NPV OF MODEL B:

90000 - 35000 - (140000/5) = Annual net income $27000 - Tax (27000 * 0.35) = 17550 + Depreciation $28000 = Annual cash flow $45550 * PVIFA(15%,5) i.e. 3.3522 = Present value of future cash flow $152693 - initial investment 140000= NPV $12693 , PER YEAR NPV = 12693/5 = $2539

As both the Machines are having positive NPV, but we should purchase Model A as it has more NPV per year.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.