Mars Corp.is choosing between two different capital investment proposals.Machine A has a useful life of 4 years,and Machine B has a useful life of 6 years.Each proposal requires an initial investment of $200,000,and the company desires a rate of return of 10%.Although Machine B has a useful life of 6 years,it could be sold at the end of 4 years for $35,000.

Question

Quizplus · Accepted Answer

To compare the present values of the two proposals, we need to calculate the net present value (NPV) of each.

For Machine A, the NPV after 4 years can be calculated as follows:

Initial investment: -$200,000 
Annual cash inflow: $68,732 (calculated using the annuity formula with a 10% discount rate) 
NPV after 4 years: -$200,000 + $233,318 = $33,318

For Machine B, we need to consider the salvage value at the end of year 4:

Initial investment: -$200,000 
Annual cash inflow: $48,172 (calculated using the annuity formula with a 10% discount rate) 
Salvage value at year 4: $35,000 
NPV after 4 years: -$200,000 + $187,012 + $21,385 (NPV of salvage value at year 4) = $8,397

Therefore, Machine A has a higher net present value after 4 years and should be chosen by Mars Corp.

Mars CorpIs Choosing Between Two Different Capital Investment Proposals