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Problem J Machine 1 Machine 2 Cost $30,000 $25,000 Inflows Year 1 0 $      9,000 Year...

Problem J

Machine 1 Machine 2
Cost $30,000 $25,000
Inflows
Year 1 0 $      9,000
Year 2 0 $      9,000
Year 3 $20,000 $      9,000
Year 4 $20,000 $      9,000
Using a 14% discount rate, which machine gives a better return?
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Homework Answers

Answer #1

Machine 1:

Discount Rate = 14%

Cash Flows:
Year 0 = -$30,000
Year 1 = $0
Year 2 = $0
Year 3 = $20,000
Year 4 = $20,000

NPV = -$30,000 + $0 + $0 + $20,000/1.14^3 + $20,000/1.14^4
NPV = -$4,658.96

Machine 2:

Discount Rate = 14%

Cash Flows:
Year 0 = -$25,000
Year 1 = $9,000
Year 2 = $9,000
Year 3 = $9,000
Year 4 = $9,000

NPV = -$25,000 + $9,000/1.14 + $9,000/1.14^2 + $9,000/1.14^3 + $9,000/1.14^4
NPV = $1,223.41

So, Machine 2 is offering better returns than Machine 1.

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