Toward the end of the first year, Spacemonitor’s factory construction costs were higher than expected. The company had already used external financing and the company’s Treasurer felt he could not approach the banks or the financial market again for the next two years. These factors limited the remaining budget for machinery and equipment. The chief engineer called upon the financial analyst again to help him choose machines that made the best use of the limited funds available. The financial analyst decided to rank the less essential machines in the descending order of their PI values. This would help to make choices that would maximize the PV per unit of investment in the machinery.

Given below are data for two of the machines.

(a) What is the PI for each machine?

(b) Which machine would generate the most value for shareholders?

(c) Could we not simply choose the machine with the largest NPV?

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Machine A B PV 120 300 NPV 20 30 Initial investment 100 270