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.

Machine A will generate net cash flow of $70,000 in each of the four years.Machine B will generate $80,000 in year 1,$70,000 in year 2,$60,000 in year 3,and $40,000 per year for the remaining 3 years of its useful life.
Which of the following statements portrays the most accurate analysis between the two proposals?

Question

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.

Machine A will generate net cash flow of $70,000 in each of the four years.Machine B will generate $80,000 in year 1,$70,000 in year 2,$60,000 in year 3,and $40,000 per year for the remaining 3 years of its useful life.
Which of the following statements portrays the most accurate analysis between the two proposals?

Quizplus · Accepted Answer

The net present value (NPV) of each proposal can be calculated using the given information and a 10% discount rate. For Machine A, the NPV after 4 years is:
NPV = -$200,000 + $70,000/(1.1) + $70,000/(1.1)^2 + $70,000/(1.1)^3 + $70,000/(1.1)^4
NPV = $22,275.04
For Machine B, the NPV after 4 years (assuming it is sold for $35,000) is:
NPV = -$200,000 + $80,000/(1.1) + $70,000/(1.1)^2 + $60,000/(1.1)^3 + ($40,000 + $35,000)/(1.1)^4
NPV = $57,561.68
Therefore, Machine B has a higher NPV after 4 years and is the better investment choice for Mars.

Mars CorpIs Choosing Between Two Different Capital Investment Proposals