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Question 8:                                        &nbs

Question 8:                                                                                                                       12 marks

            Brown Shoe Company is considering investing in one of two machines that cut leather for shoes. Machine A costs $55,000 and is expected to save the company $13,000 annual operating cash flows for six years. Machine B costs $89,000 and is expected to save the company $22,000 annual cash flows for six years.

Instructions:

  1. Determine the net present value for each machine.
  2. Decide which machine should be purchased if the required rate of return is 10 percent.
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Homework Answers

Answer #1

Net presnt value( NPV)

Project with highest NPV are pursued

It is calculated by using the following formula

So the second machinery having the highest NPV can be purchased as it could earn more in short time.

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