Cannula Vending Corporation is expanding operations and needs to purchase additional vending machines. There are currently two companies, Viscera, Incorporated and Gullet International, that produce and sell machines that will do the job. Information related to the specifications of each company's machine are as follows (Ignore income taxes.): Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Cannula's discount rate is 18%. Cannula uses the straight-line method of depreciation. Using net present value analysis, which company's machine should Cannula purchase and what is the approximate difference between the net present values of the competing company's machines?

Question

Cannula Vending Corporation is expanding operations and needs to purchase additional vending machines. There are currently two companies, Viscera, Incorporated and Gullet International, that produce and sell machines that will do the job. Information related to the specifications of each company's machine are as follows (Ignore income taxes.):  Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Cannula's discount rate is 18%. Cannula uses the straight-line method of depreciation. Using net present value analysis, which company's machine should Cannula purchase and what is the approximate difference between the net present values of the competing company's machines?

Quizplus · Accepted Answer

To determine the net present values (NPV) of each machine, we need to calculate the initial investment, annual cash flows, and the appropriate discount factor using Cannula's discount rate of 18%.

For Viscera's machine:
- Initial investment: $39,000
- Annual cash flows: $12,000 for 8 years
- Discount factor: 5.746 (from Exhibit 14B-1)
- NPV: (-$39,000) + ($12,000/5.746) + ($12,000/5.746^2) + ... + ($12,000/5.746^8) = -$2,907.70

For Gullet's machine:
- Initial investment: $45,000
- Annual cash flows: $11,000 for 8 years
- Discount factor: 5.746 (from Exhibit 14B-1)
- NPV: (-$45,000) + ($11,000/5.746) + ($11,000/5.746^2) + ... + ($11,000/5.746^8) = -$4,469.44

Therefore, Viscera's machine has a higher NPV, which means it is a better investment for Cannula. The approximate difference between the NPVs is $1,562.

Cannula Vending Corporation Is Expanding Operations and Needs to Purchase