The production department is proposing the purchase of an automatic insertion machine.It has identified 3 machines and have asked the accountant to analyze them to determine which of the proposals (if any)meet or exceed 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?

Question

The production department is proposing the purchase of an automatic insertion machine.It has identified 3 machines and have asked the accountant to analyze them to determine which of the proposals (if any)meet or exceed 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?

Quizplus · Accepted Answer

To calculate the net present value (NPV) of each machine, we need to calculate the present value of cash inflows and outflows for each year over the 10-year useful life of the machines.

For Machine A:
NPV = (500,000 - 50,000)/((1+0.10)^1) + (80,000 - 50,000)/((1+0.10)^2) + ... + (80,000 - 50,000)/((1+0.10)^10) - 500,000
NPV = 177,031.55

For Machine B:
NPV = (450,000 - 30,000)/((1+0.10)^1) + (95,000 - 30,000)/((1+0.10)^2) + ... + (95,000 - 30,000)/((1+0.10)^10) - 450,000
NPV = 237,766.36

For Machine C:
NPV = (550,000 - 60,000)/((1+0.10)^1) + (75,000 - 60,000)/((1+0.10)^2) + ... + (75,000 - 60,000)/((1+0.10)^10) - 550,000
NPV = 128,654.48

Both Machine A and Machine C have a positive NPV, which means they meet the company's minimum desired rate of return of 10%. Machine B has a higher NPV than both Machines A and C, but it still meets the company's rate of return policy.

Therefore, the best choice(s) are Machines A and C.

The Production Department Is Proposing the Purchase of an Automatic