Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: End of Machine A Machine B

Year

1 $5,000 $1,000

2 $4,000 $2,000

3 $2,000 $11,000

Turk Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Turk purchase and why? Hint: This is a two-part question. Part 1. Make sure you calculate the NPV for both machines and Part 2. Which machine should the company invest in and why? .Check: The NPV for one of the two machines will be a negative number. (3 points)

Respond to both parts of this problem on the next page.

Part 1. Use the tables below to calculate the Net Present Value for each machine.

Machine A Net Cash Flows PV Factor PV of Net Cash Flows

Year 1

Year 2

Year 3

Total

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Less: Initial Investment

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Net Present Value

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Machine B Net Cash Flows PV Factor PV of Net Cash Flows

Year 1

Year 2

Year 3

Total

-------------------------

Less: Initial Investment

-------------------------

Net Present Value

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Part 2. Which machine should the company invest in and why?