Question 18

5 pts

Tony's Taco Shack is thinking about buying a commercial ice cream machine so that they can sell their famous refried-beans-with-sour-cream-and-picante-sauce-flavored ice cream (topped with guacamole-flavored caramel sauce and crushed tortilla chips). Tony is considering two different machines. Each one is projected to generate different sets of cash flows to the Taco Shack:

Machine A (The Rapido model)

Cost: $40,000. Cash flows: Year 1: $25,000; Year 2: $26,000; Year 3: $31,000

Machine B (The Delicioso model)

Cost: $58,000. Cash flows: Year 1: $16,000; Year 2: $29,000; Year 3: $41,000

Tony's cost of capital is 19%. Calculate the NPV for each machine. Are they both acceptable? Rank them. Which one is the best investment for Tony (based on NPV)?

Group of answer choices

They are both acceptable. Machine A has a much larger NPV and is the best investment for Tony.

Machine B is the only one that is acceptable. Tony should invest in Machine B.

Neither one is acceptable. They should both be rejected.

Machine A is the only one that is acceptable. Tony should invest in Machine A.