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Which design should jim go with if using a discount rate

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Jim D'Addario of the well-known guitar and bass string factory, D'Addario Strings in Long Island, NY, is considering two new designs for more efficient and higher quality machines. (The company has won many manufacturing and product patents in the field.)

Assume machine A costs $750,000 to make and is expected to return the following net earnings over five years, after which time it is retired: $10 million, $9 million, $8 million, $7 million, and $6 million, respectively.

Assume machine B costs $850,000 to make and is expected to return the following net earnings over five years, after which time it is also retired: $10.1 million, $9.1 million, $8.1 million, $7.1 million, and $6.1 million, respectively.

Problem 1: All other things being equal, what is the net present value of both machines, and which design should Jim go with if he is using a discount rate of 7%?

Reference no: EM132972065

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