Question
Below you are given two machines that if adopted would lower your annual production cost. Your required rate of return (discount rate) is 11.5%. Machine
Below you are given two machines that if adopted would lower your annual production cost. Your "required rate of return (discount rate)" is 11.5%.
Machine A
After-Tax Initial Cost = $3200
3-year Life
Annual after-tax savings = $1500
Expected Salvage Value = $0
Straight-line Depreciation
Machine B
After-Tax Initial Cost = $2000
2-year Life
Annual after-tax savings = $1400
Expected Salvage Value = $0
Straight-line Depreciation
(a)Calculate the NPV for each machine. Show your work.
NPVA = _________________________________
NPVB = _________________________________
(b) Whichever machine you adopt will be used forever (you will purchase and use it over and over again). Which machine would you recommend and why? (hint: look at the title of this question). Show your work
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Foundations of Finance The Logic and Practice of Financial Management
Authors: Arthur J. Keown, John D. Martin, J. William Petty
8th edition
132994879, 978-0132994873
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