Question

Machine A which is a basic model costs $25,000 and lasts 5 years. At the end of the 5 years it has a salvage value of $1,500 and its market value at the end of 3 years is $7,000. An enhanced model, Machine B sells for $36,000 and has a life of 8 years with a salvage value of $8,500. The benefit that these two machines are anticipated to provide is $9,500 per year, indefinitely. Looking at an 8-year window with a rate of 10% APR compounded yearly, what is the difference between the net present worth of Machine B over Machine A? (Hint: the second copy of Machine A can be sold at the end of the 8th year for the price that it will command after a 3-year life.

$4,291

$11,565

$2,940

$8,428

Answer 1

Ans) $4,291

Statement showing NPV of machine A

Particulars	0	1	2	3	4	5	6	7	8	NPV = sum of PV
Cost of machine	-25000					-25000
Benefits		9500	9500	9500	9500	9500	9500	9500	9500
Salvage value						1500			7000
Total cash flow	-25000	9500	9500	9500	9500	-14000	9500	9500	16500
PVIF @ 10%	1	0.9091	0.8264	0.7513	0.6830	0.6209	0.5645	0.5132	0.4665
PV	-25000	8636	7851	7137	6489	-8693	5363	4875	7697	14356

Thus NPV of machine A = 14356 $

Statement showing NPV of machine B

Particulars	0	1	2	3	4	5	6	7	8	NPV = sum of PV
Cost of machine	-36000
Benefits		9500	9500	9500	9500	9500	9500	9500	9500
Salvage value									8500
Total cash flow	-36000	9500	9500	9500	9500	9500	9500	9500	18000
PVIF @ 10%	1	0.9091	0.8264	0.7513	0.6830	0.6209	0.5645	0.5132	0.4665
PV	-36000	8636	7851	7137	6489	5899	5363	4875	8397	18647

Thus NPV of machine B = 18647 $

Difference between NPV of Machine B over Machine A

= 18647 - 14356

= $4291