(NPV) A company has the choice between two different types of machines. Machine A costs less,...
(NPV) A company has the choice between two different types of machines. Machine A costs less, but it also has a shorter life expectancy of two years. B costs more but lasts longer for four years. The expected cash flows after taxes for the two different types are as follows:
|
Machine |
0 |
1 |
2 |
3 |
4 |
|
A |
(10,000) |
8,000 |
8,000 |
||
|
B |
(12,000) |
5,000 |
5,000 |
5,000 |
5,000 |
The cost of money of the firm is 10%. Analyze the two options and advise the company which one is better.
show how to solve with formula and with financial calculator
Homework Answers
To compare these two machines we should calculate NPV of both
projects and then calculate Equivalent annual cash flows to compare
projects with unequal lives.
NPV of Project A =PV of Cash Flows -Initial Investment
=8000*(1-(1+10%)^-2)/10%-10000 =3884.2975
NPV of Project B =PV of Cash Flows -Initial Investment
=5000*(1-(1+10%)^-4)/10%-12000 =3849.3272
Equivalent annual Cash flows of A using Financial calculator
N=2;I/Y =10%;PV =3884.2975;CPT PMT
PMT = 2238.10
Equivalent annual Cash flows of B using Financial calculator
N=4;I/Y =10%;PV =3849.3272;CPT PMT
PMT = 1214.35
Since PMT of Project A is higher it should be selected.
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Year
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3
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5
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7
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Year
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1
$-6,000
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2
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3
-8,000
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4
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-3,000
5
-6,000
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6
-5,000
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7
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