Campbell Corporation is planning to add a new machine to its current plant. There are two...

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Campbell Corporation is planning to add a new machine to itscurrent plant. There are two machines it is considering, with cashflows as follows:
MachineA      0            1             2          3          4
                 -10,000     4000         4000   4,000     4000
MachineB      0                 1                  2                 3
                     -5,000        3,000           3,000         3,000
Which machine should Campbell choose?Assume the cost of capital is 9%.

Answer & Explanation Solved by verified expert

4.2 Ratings (813 Votes)

To decide which machine should Campbell choose we need to find out the Net Present Value or NPV of the machine. Machine with the higher NPV will be selected.

Calculation of Net Present Value

MACHINE A
Years	Cash inflows ($)	Discounting Factor @ 9%	Present Value($)
1	4,000	0.9174	3669.7248
2	4,000	0.8417	3366.7200
3	4,000	0.7722	3088.7339
4	4,000	0.7084	2833.7008

	Total Present Value (A)		12,958.8795

	Initial Investment (B)		10,000.00

	Net Present Value (A-B)		2,958.8795

MACHINE B
Years	Cash inflows ($)	Discounting Factor @ 9%	Present Value($)
1	3,000	0.9174	2752.2936
2	3,000	0.8417	2525.0400
3	3,000	0.7722	2316.5504

	Total Present Value (A)		7,593.8840

	Initial Investment (B)		5,000.00

	Net Present Value (A-B)		2,593.8840

Since Machine A has higher Net Present Value than Machine B, it should be selected.

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Transcribed Image Text

Campbell Corporation is planning to add a new machine to itscurrent plant. There are two machines it is considering, with cashflows as follows:MachineA 0 1 2 3 4 -10,000 4000 4000 4,000 4000 MachineB 0 1 2 3 -5,000 3,000 3,000 3,000 Which machine should Campbell choose?Assume the cost of capital is 9%.