The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine which of the proposals (if any) meets or exceeds the company's policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has an estimated useful life of 10 years.The accountant has identified the following data:?Which of the investments are acceptable? $\begin{array}{|l|r|r|r|}
\hline & \text { Machine A } & \text { Machine B } & \text { Machine C } \
\hline \begin{array}{r}
\text { Present value of future cash flows } \
\text { computed using 10\% rate of return }
\end{array} & \$ 305,000 & \$ 295,000 & \$ 300,000 \
\hline \text { Amount of initial investment } & 300,000 & 300,000 & 300,000 \
\hline
\end{array}$

Question

Quizplus · Accepted Answer

The net present value (NPV) of an investment is calculated by subtracting the initial investment from the present value of future cash flows. For Machine A, the NPV is $5,000 ($305,000 - $300,000), for Machine B, the NPV is -$5,000 ($295,000 - $300,000), and for Machine C, the NPV is $0 ($300,000 - $300,000). Since the company's policy requires a minimum desired rate of return of 10%, only investments with a non-negative NPV meet or exceed this criterion. Therefore, Machines A and C, with NPVs of $5,000 and $0 respectively, are acceptable.

The Production Department Is Proposing the Purchase of an Automatic