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Problem #3 Company needs to decide between two machines. Machine C costs 10,000 and produce after tax...

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Finance

Problem #3

Company needs to decide between two machines.

Machine C costs 10,000 and produce after tax cash flows of 4,000per year for 3 years. No salvage.

Machine D costs 14,000 and produce after tax cash flows of 3,000per year for 7 years. No salvage.

Discount rate is 8%

Which machine would you recommend?

Answer & Explanation Solved by verified expert
4.1 Ratings (532 Votes)

Machine C
cost 10000
Dicount rate 8%
n= year
year(n) cash flow PVF Present value
1/((1+8%)^n) PVF*cash flow
0 -10000                  1.00            -10,000.00
1 4000                  0.93                3,703.70
2 4000                  0.86                3,429.36
3 4000                  0.79                3,175.33
SUM                   308.39
Machine D
cost 14000
Discount rate 8%
n= year
year(n) cash flow PVF Present value
1/((1+8%)^n) PVF*cash flow
0 -14000                  1.00            -14,000.00
1 3000                  0.93                2,777.78
2 3000                  0.86                2,572.02
3 3000                  0.79                2,381.50
4 3000                  0.74                2,205.09
5 3000                  0.68                2,041.75
6 3000                  0.63                1,890.51
7 3000                  0.58                1,750.47
SUM                1,619.11

as we can see, machine D gives greater return as present value compared to Machine C. So I would recommend Machine D.
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Transcribed Image Text

Problem #3Company needs to decide between two machines.Machine C costs 10,000 and produce after tax cash flows of 4,000per year for 3 years. No salvage.Machine D costs 14,000 and produce after tax cash flows of 3,000per year for 7 years. No salvage.Discount rate is 8%Which machine would you recommend?

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