Homework Answers
For the E Series machine
As,
Annual Cash flow is = (Annual Income - Annual Expense)
Annual cash flow or the total cost = $19,400 - $10,000 = 9,400
Calculated from excel,
Present worth of the future cash flow
= PV(0.08,7,-9400,0)
= $48,939.88
Present worth of the Salvage Value
= PV(0.08,10,0,-10000)
= $5,834.90
And, the given Initial Cost is = $40,000
Therefore,
Net Present value = PV of future cashflow + PV of Salvage Value - Initial Cost
NPV = 48,939.88 + 5,834.90 - 40,000
= $14,774.78
For the M Series machine
Annual cash flow or the total cost = $26,000 - $6,000 = 20,000
Present worth of the future cash flow
= PV(0.08,5,-20000,0)
= $79,854.20
Present worth of the Salvage Value = 0
And, the given Initial Cost is = $60,000
Net Present value = PV of future cashflow + PV of Salvage Value - Initial Cost
NPV = 79,854.20 + 0 - 40,000
= $19,854.20
The M Series machine should be preffered as it is having a higher Net Present value.
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