a. $860 b. $798.42 c. $1917 d. none of the above. The Downton Lawn Tennis and Po

Question

a. $860

b. $798.42

c. $1917

d. none of the above.

The Downton Lawn Tennis and Polo Club must choose between two mechanical tennis ball serving machines. Machine A initially costs less than B but will not last as long. The cost (cash outflows) of the machines are provide as Machine 1 2 3 4 4 $500 $120 $120 $120 $600 $100 $100 $100 $100 The initial cost of each machine is provided in period 0, followed by annual operating costs. We are interested in purchasing the least cost machine. The required return is 10%.

Explanation / Answer

Year Cash flow PVF 10% Present value 0 $                   500 1.000 $               500.00 1 $                   120 0.909 $               109.09 2 $                   120 0.826 $                 99.17 3 $                   120 0.751 $                 90.16 Present value of total cost of A $               798.42

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