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	$10,000		$20,000
Labor per year	$2,000		$4,400
Maintenance per year	$4,300		$800
Salvage value	$1,600		$7,500

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=​$__________ ​(round your response to the nearest whole number and include a minus sign if​ necessary).

The NPV for Machine B=​$__________ ​(round your response to the nearest whole number and include a minus sign if​ necessary).

Using the net present value as the basis of comparing the machines, Tim should recommend Machine A or B?

Answer 1

Note: Please rate the answer (upvote) and do ask if any doubt is there.

Answer:

1)

NPV machine A:

• The image below contains all the denotation, formula, calculations and is self-explanatory in nature.
• R in the PV formula is the rate of return = 12%
• NPV is the sum of all present values.
• NPV = -$21985 (Answer)

2)

NPV machine B:

• The image below contains all the denotation, formula, calculations and is self-explanatory in nature.
• R in the PV formula is the rate of return = 12%
• NPV is the sum of all present values.
• NPV = -$26489 (Answer)

3)

Machine A is better as it has better NPV than machine B.  (Answer)

Note: Please rate the answer (upvote) and do ask if any doubt is there.