Question 8: 12 marks

Brown Shoe Company is considering investing in one of two machines that cut leather for shoes. Machine A costs $55,000 and is expected to save the company $13,000 annual operating cash flows for six years. Machine B costs $89,000 and is expected to save the company $22,000 annual cash flows for six years.

Instructions:

1. Determine the net present value for each machine. (9 marks)
2. Decide which machine should be purchased if the required rate of return is 10 percent. (3 marks)