Question
Tim Smunt has been asked to evaluate two machines. After some investigation, he determines that they have the costs shown in the following table: Machine
Tim Smunt has been asked to evaluate two machines. After some investigation, he determines that they have the costs shown in the following table:
Machine A | Machine B | |||
Original Cost | $ 10 comma 000$10,000 | $ 20 comma 000$20,000 | ||
Labor per year | $ 2 comma 000$2,000 | $ 4 comma 000$4,000 | ||
Maintenance per year | $ 4 comma 000$4,000 | $ 1 comma 000$1,000 | ||
Salvage value | $ 2 comma 000$2,000 | $ 7 comma 000$7,000 |
He is told to assume that:
1. The life of each machine is 33 years.
2. The company thinks it knows how to make 1212% on investments no more risky than this one.
3. Labor and maintenance are paid at the end of the year.
1. The NPV for machine A = $____
2. The NPV for machine B= $_____
3. Which machine should Tim recommend?
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