Woody Manufacturing Inc.is considering the purchase of a new machine.They have narrowed their choices down to two machines,Machine #1 and Machine #2,each having a cost of $40 000.The following information is available regarding the expected cash inflows from each machine:
$$\begin{array} { c c c }
\text { Year } & \text { Machine \#1 } & \text { Machine \#2 } \
\hline 1 & \$ 20000 & \$ 60000 \
2 & 20000 &0 \
3 & 20000 & 0 \
3 &20 000&0
\end{array}$$
When using net present value analysis,Woody uses the same cost of capital for both machines and both machines have a positive net present value.
Based on the above information,which of the following statements is true?

Question

Woody Manufacturing Inc.is considering the purchase of a new machine.They have narrowed their choices down to two machines,Machine #1 and Machine #2,each having a cost of $40 000.The following information is available regarding the expected cash inflows from each machine:
$$\begin{array} { c c c } 
\text { Year } & \text { Machine \#1 } & \text { Machine \#2 } \
\hline 1 & \$ 20000 & \$ 60000 \
2 & 20000 &0 \
3 & 20000 & 0 \
3 &20 000&0
\end{array}$$
When using net present value analysis,Woody uses the same cost of capital for both machines and both machines have a positive net present value.
Based on the above information,which of the following statements is true?

Quizplus · Accepted Answer

Machine #2 has a higher initial cash inflow in the first year compared to Machine #1, which has equal cash inflows across all years. Given the time value of money principle, earlier cash inflows have a higher present value, making Machine #2's net present value higher than Machine #1's, assuming the cost and discount rate are the same for both machines.

Woody Manufacturing Inc When Using Net Present Value Analysis,Woody Uses the Same Cost