Holder Manufacturing is considering purchasing two machines.Each machine costs $8,000 and will produce cash flows as follows: $\begin{array}{l}
\text {End of } \quad\quad\quad \text { Machine } \
\begin{array}{lrr}
\text { Year } &\text { A } & { \text { B } } \
1 & \$ 5,000 & \$ 1,000 \
2 & 4,000 & 2,000 \
3 & 2,000 & 11,000
\end{array}
\end{array}$
Holder Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments.The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575.Which machine should Holder purchase?

Question

Holder Manufacturing is considering purchasing two machines.Each machine costs $8,000 and will produce cash flows as follows: $\begin{array}{l}
 \text {End of  }  \quad\quad\quad \text { Machine } \
\begin{array}{lrr}
\text {  Year } &\text { A } & { \text { B } } \
1 & \$ 5,000 & \$ 1,000 \
2 & 4,000 & 2,000 \
3 & 2,000 & 11,000
\end{array}
\end{array}$
 Holder Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments.The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575.Which machine should Holder purchase?

Quizplus · Accepted Answer

To calculate the net present value (NPV) for each machine, we need to discount the cash flows using the present value factors provided and then subtract the initial cost of the machine:

NPV(A) = -8000 + 5000(0.8696) + 4000(0.7561) + 2000(0.6575) + 1000(0) + 0(0) + 11000(0) = $4,640.94

NPV(B) = -8000 + 1000(0.8696) + 2000(0.7561) + 11000(0.6575) + 5000(0) + 4000(0) + 2000(0) = $3,927.06

Since both machines have positive NPVs, both are acceptable investments. However, Machine A has a higher NPV and should be selected over Machine B. Therefore, the best choice is option D: Both machines are acceptable, but B should be selected because it has the greater net present value.

Holder Manufacturing Is Considering Purchasing Two Machines Holder Manufacturing Uses the Net Present Value Method to Make