Considering the purchase of new piece of machinery

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Reference no: EM132052790

1. Peak Industries is considering the purchase of a new piece of machinery. The machinery requires an initial investment of $158,000 and is expected to produce net annual cash flows of $39,000 for the next five years. In terms of intangible benefits, Peak estimates the machinery will save the company $4,500 each year in labor costs. If the project’s estimated NPV is $39,163 and Peak is using a discount rate of 8%, then what is the machinery’s salvage value (the PV of an annuity at 8% for 5 periods = 3.9927; the PV of 1 at 8% for 5 periods = .6806)?

A. $34,500

B. $31,060

C. $28,500

D. $23,040

2. JT Engineering is deciding between two machines. Machine A costs $352,000, with inflows of $209,000 and outflows of $154,000. Machine B costs $380,000, with inflows of $231,000 and outflows of $166,000. Both have a 10-year life and no salvage value. JT uses the straight-line method for depreciation and requires a return of 12%. How desirable are the machines? Use annual rate of return to determine the answer.

A. Neither Machine A nor Machine B is desirable.

B. Machine A and Machine B are equally desirable.

C. Machine B is desirable and Machine A is not desirable.

D. Machine A is desirable and Machine B is not desirable.

3. RL Enterprises is considering two projects. Project A will generate $220,000 net cash flows over eight years, and annual flows will be equal. Project B will also generate $220,000 over eight years, but flows will decrease over time. Project A’s NPV is $123,000 and Project B’s is $132,000. What aspect of the uneven cash flow scenario accounts for this difference?

A. Compensation is required for the risk, resulting in a more favorable discount rate for the uneven cash flow scenario.

B. More money is received sooner under the uneven cash flow scenario, making its present value greater.

C. Uneven cash flow scenarios result in more profit over a project’s lifetime, increasing the project’s present value.

D. Simplifying NPV assumptions dictate that assumed cash flows are higher in uneven cash flow scenarios, making present value higher.

Reference no: EM132052790

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