Question

18. Quilt Appraisers is considering purchasing two machines. Each machine costs $33,000, has 3-year useful life, with a $5,000 salvage value. Purchase and use of the machine purchased is expected to produce $39,000 in cash flows as follows: Cash flows Year 1 Year 2 Year 3 Machine 1 $ 8,000 $ 8,000 $ 23,000 Machine 2 $ 13,000 $ 13,000 $ 13,000 onjong Donna, the owner, uses the net present value method to make the decision of which machine to invest in and she wants a 12% annual return on investments, Calculate the net present value for each machine and indicate which machine should be purchased.

Answer 1

Machine 1

Year	Cash inflow	PVF	Present value of cash inflow
1	8,000	0.89286	7,142.88
2	8,000	0.79719	6,377.52
3	23,000	0.71178	16,370.94
3	5,000	0.71178	3,558.9
Total			$33,450

Net present value = Present value of cash inflow - Cost of machine

= 33,450 - 33,000

= $450 (Rounded to nearest whole dollar)

Machine 2

Year	Cash inflow	PVF	Present value of cash inflow
1	13,000	0.89286	11,607.18
2	13,000	0.79719	10,363.47
3	13,000	0.71178	9,253.14
3	5,000	0.71178	3,558.9
Total			$34,783

Net present value = Present value of cash inflow - Cost of machine

= 34,783 - 33,000

= $1,783 (Rounded to nearest whole dollar)

Since, Net present value of machine 2 is higher than machine 1, hence, machine 2 should be purchased

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