Question
PROBLEM 9-8. Choosing among Alternative Investments. Pronto Cleaners, a chain of dry- cleaning stores, has the opportunity to invest in one of two dry cleaning
PROBLEM 9-8. Choosing among Alternative Investments. Pronto Cleaners, a chain of dry- cleaning stores, has the opportunity to invest in one of two dry cleaning machines. Machine A has a four-year expected life and a cost of $30,000. It will cost an additional $6,500 to have the machine delivered and installed, and the expected residual value at the end of four years is $4,000. Machine B has a four-year expected life and a cost of $55,000. It will cost an additional $7,000 to have the machine delivered and installed, and the expected residual value at the end of four years is $6,000. Pronto has a required rate of return of 14 percent. Additional cash flows related to the machines are as follows:
Item | Year 1 | Year 2 | Year 3 | Year 4 |
Labor saving | $25,000 | $25,000 | $25,000 | $25,000 |
Power saving | 1,500 | 1,500 | 1,500 | 1,500 |
Chemical saving | 3,000 | 3,000 | 3,000 | 3,000 |
Additional maintenance | (1,200) | (1,200) | (1,200) | (1,200) |
Additional misc. | (2,500 | (2,500 | (2,500 | (2,500 |
Machine A
Item | Year 1 | Year 2 | Year 3 | Year 4 | |
Labor saving | $32,000 | $32,000 | $32,000 | $32,000 | |
Power saving | 2,000 | 2,000 | 2,000 | 2,000 | |
Chemical saving | 3,500 | 3,500 | 3,500 | 3,500 | |
Additional maintenance | (1,500) | (1,500) | (1,500) | (1,500) | |
Additional misc. | (2,700) | (2,700) | (2,700) | (2,700) | |
Machine B
Required
a. Ignoring taxes, determine the net present value of investing in machine A.
b. Ignoring taxes, determine the net present value of investing in machine B.
c. Which, if any, machine should be purchased?
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