Question

WileyPLUS Problem 13-3 Alara Corporation is considering purchasing one of two new machines Estimates for each machine ase as follows Machine A Machine B Investment $108,800 $154,500 Estimated fe 8 years 8 years $26,900 Estmated annual cash infows $39,300 Estimated annual cash outflows $5,900 $9,800 Salvage value for each machine is estimated to be zero. ck here to view PV table Calulate the net present value of each project assuming a 5t% discount rate. (f the net present value is negative, use either a negative sign preceding the nomber eg-45 or parentheses eg (45). For Net Present Value Machine A Machine Which project should the company choose? INK TO TEXT

Answer 1

Increase in annual cash inflows Increase in annual cash outflows Net annual cash inflows Annuity factor @ 5% for 8 years Present value of net annual cash flows Less: Initial investment Net Present Value (NPV) Machine A $26,900 -$5,900 $21,000 6.46321 $135,727 -$108,800 $26,927 Machine B $39,300 -$9,800 $29,500 --> (a) 6.46321 --> (b) [Rounded-off to 5 decimal places] $190,665 --> (a) x (b) $154,500 $36,165 Positive NPV implies that the project is capable of recovering present value of all its cash outflows before expiry of the project's life itself. So, as the NPV is positive for both machines, both machines are acceptible but Machine-B shall be chosen because it yields higher positive NPV than Machine-A.

NOTE: Annuity factor @ 5% for 8 years can be traced from the PVA of $1 table provided or it can be calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=5%; nper=8; pmt=-1, fv=0; type=0. Here, type = 0 implies that the cash flows occur at the end of each year only; pmt=-1 as it is an annuity factor. EXCEL SCREENSHOT: 2 Increase in annual cash inflows 3 Increase in annual cash outflows 4. Net annual cash inflows 5 Annuity factor @ 5% for 8 years 6 Present value of net annual cash flows 7 Less: Initial investment 8 Net Present Value (NPV) Machine A $26,900 $5,900 =SUM(B2:B3) =ROUND(PV(5%,8,-1,0,0),5) =B4*B5 -$108,800 =SUM(B6:B7) Machine B $39,300 -$9,800 =SUM(C2:03) =ROUND(PV(5%,8,-1,0,0),5) =C4*C5 -$154,500 =SUM(C6:07)