Calculate the net present value for both machines

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Reference no: EM131882812

Smith Company is considering the acquisition of two machines.

Machine A Machine B

Initial investment $200,000 $200,000

Annual operating revenues (end of year) $100,000 $160,000

Annual expenses (end of year) $25,000 $85,000

Terminal salvage value $10,000 $20,000

Estimated useful life 5 years 5 years

Minimum desired rate of return 14% 14%

Assume straight-line depreciation. Ignore income taxes. The present value of an ordinary annuity of one at 14% and 5 periods is 3.4331. The present value of one at 14% and 5 periods is 0.5194.

Required:

A) Calculate the net present value for both machines.

B) Assume there are enough funds to purchase both machines. Should both machines be purchased?

C) Assume there are funds to purchase only one machine. Which machine should be purchased?

Reference no: EM131882812

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