Tim Smunt has been asked to evaluate two machines. After some investigation, he
ID: 464751 • Letter: T
Question
Tim Smunt has been asked to evaluate two machines. After some investigation, he determines that they have the costs shown in the following table.
Machine A Machine B
Original Cost $12,000 $28,000
Labor per Year $2,200 $4,800
Maintenance per yr $ 4,300 $800
Salvage Value $ 2,400 $7,000
He is told to assume that:
1. The life of each machine is 3 years.
2. The company thinks it knows how to make 12% on investments no more risky than this one.
3. Labor and maintenance are paid at the end of the year.
The NPV for Machine A =$
Explanation / Answer
Calculations of annual cash flows:
Year
Item
Cash Flow
0
Machine B
$(12,000)
1 3
Labor
6,600
Maintenance
12,900
Salvage
Calculation of NPV:
Year
Cash Flow
Discount Factor
Present Value
0
$(12,000)
1.000
$(12,000)
1 3
17,100
0.712
12,175
Net Present Value
$(175)
Therefore;
The NPV for Machine B = $$21,022
Year
Item
Cash Flow
0
Machine B
$(12,000)
1 3
Labor
6,600
Maintenance
12,900
Salvage
(2,400) Total $17,100Related Questions
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