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This is what I got for the NPV as I believe the 100k salvage would needed to be added in fr year 10.
NPV of Machine 1 is $347,802
NPV of Machine 2 is $792,287
If something is wrong, can it please be shown to me so I understand.
Below is the questions:
A manufacturer is considering two alternative machine replacements. Machine 1 costs $1 million with an expected life of 5 years and will generate after-tax cash flows of $350,000 a year. At the end of 5 years, the salvage value on Machine 1 is zero, but the company will be able to purchase another Machine 1 for a cost of $1.2 million. The replacement Machine 1 will generate after-tax cash flows of $375,000 a year for another 5 years. At that time its salvage value will also be zero. The manufacturer's second option is to buy Machine 2 at a cost of $1.5 million today. Machine 2 will produce after-tax cash flows of $400,000 a year for 10 years, and after 10 years it will have an after-tax salvage value of $100,000. The cost of capital for both machines is 12%.
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