Question

Aliara Corporation is considering purchasing one of two new machines.

Estimates for each machine are as follows:

		Machine A			Machine B
Investment		$109,000			$154,900
Estimated life		9 years			9 years
Estimated annual cash inflows		$26,600			$39,700
Estimated annual cash outflows		$6,400			$9,800

Salvage value for each machine is estimated to be zero.

Click here to view PV table.

Calculate the net present value of each project assuming a 5% discount rate. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided, e.g. 1.25124. Round present value answer to 0 decimal places, e.g. 125.)

		Net Present Value
Machine A		$
Machine B		$

Which project should the company choose?

Machine AMachine B

Answer 1

Answer- Net present value of Machine A= $34578.

Net present value of Machine B= $57624

Explanation-Net present value of Machine A = Present value of cash inflows – Total outflows

= {($26600-$6400)*7.10782} - $109000

= ($20200*7.10782)-$109000

= $143578 - $109000

= $34578

Net present value of Machine B = Present value of cash inflows – Total outflows

= {($39700-$9800)*7.10782} - $154900

= ($29900*7.10782)- $154900

= $212524-$154900

= $57624

The company should choose Machine B because Machine B provides higher present value compare with the Machine A.