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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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?