Question
Jupiter Corp. is choosing between two different capital investment proposals. Machine A has a useful life of 4 years, and Machine B has a useful
Jupiter Corp. is choosing between two different capital investment proposals. Machine A has a useful life of 4 years, and Machine B has a useful life of 6 years. Each proposal requires an initial investment of $200000, and the company desires a rate of return of 10%. Although Machine B has a useful life of 6 years, it could be sold at the end of 4 years for $35000.
Year | present Value of $1 at 10% |
1 | 0.909 |
2 | 0.826 |
3 | 0.751 |
4 | 0.683 |
5 | 0.621 |
6 | 0.513 |
Machine A will generate net cash flow of $70000 in each of the four years. Machine B will geberate $80000 in year 1, $70000 in year 2, $60000 in year 3, and 40000 per year for the remaining 3 years of its useful life.
Which of the following statement portrays the most accurate analysis between the two proposals?
a. Mars should invest in Machine A becuase the net present value of Machine A after 4 years is higher than the net present value of Machine B after 4 years.
b. Mars should invest in Machine B becuase the net present value of Machine A after 4 years is lower than the net present value of Machine B after 6 years.
c. Mars should invest in Machine B becuase the net present value of Machine A after 4 years is lower than the net present value of Machine B after 4 years.
d. Mars should invest in Machine A becuase the net present value of Machine A after 4 years is higher than the net present value of Machine B after 6 years.
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