All figures in the question are amount in $
Given | ||
Machine A | Machine B | |
Initial Cost | 15000 | 20000 |
Labor cost per year | 2000 | 4400 |
Maint cost per year | 4000 | 800 |
Salvage value | 2400 | 7500 |
Depreciation / year | 4200 | 4,166.67 |
(Initial Cost - Salvage value ) / Life of the machine | ||
Machine A | |||
Year | Flow | Present Value | Discounted factor @ 14% |
0 | -15000 | -15000 | |
1 | -6000 | -5262 | 0.877 |
2 | -6000 | -4614 | 0.769 |
3 | -6000 | -4050 | 0.675 |
3 | 2400 | 1620 | 0.675 |
NPV | -27306 | ||
Note 1 | Depreciation shall not be considered for cash flows | ||
as it is not affecting cash flows | |||
Note 2 | Every year there is an outflow of 6000 i.e. | ||
Labor - 2000 , Maint - 4000 | |||
Net Present value ( NPV ) for Machine A is | -27306 |
Machine B | |||
Year | Flow | Present Value | Discounted factor @ 14% |
0 | -20000 | -20000 | |
1 | -5200 | -4560.4 | 0.877 |
2 | -5200 | -3998.8 | 0.769 |
3 | -5200 | -3510 | 0.675 |
3 | 7500 | 5062.5 | 0.675 |
NPV | -27006.7 | ||
Depreciation shall not be considered for cash flows | |||
as it is not affecting cash flows | |||
Every year there is an outflow of 5200 i.e. | |||
Labor - 4400 , Maint - 800 | |||
Net Present value ( NPV ) for Machine B is | -27006.7 |
Using the Net Present Value method , Mrs. Leskoshe should recommend Machine B |
Mrs. Leskoshe, VP of operations at ADM, has to make a decision between two investment alternatives....
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