Question

1. Campbell Corporation is planning to add a new machine to its current plant. There are two machines it is considering, with cash flows as follows:

Machine A       0             1              2          3           4         

                  -10,000      4000         4000    4,000     4000      

Machine B       0                  1                   2                  3

                      -5,000         3,000            3,000          3,000           

Which machine should Campbell choose? Assume the cost of capital is 9%.

Answer 1

To decide which machine should Campbell choose we need to find out the Net Present Value or NPV of the machine. Machine with the higher NPV will be selected.

Calculation of Net Present Value

MACHINE A
Years	Cash inflows ($)	Discounting Factor @ 9%	Present Value($)
1	4,000	0.9174	3669.7248
2	4,000	0.8417	3366.7200
3	4,000	0.7722	3088.7339
4	4,000	0.7084	2833.7008
	Total Present Value (A)		12,958.8795
	Initial Investment (B)		10,000.00
	Net Present Value (A-B)		2,958.8795

MACHINE B
Years	Cash inflows ($)	Discounting Factor @ 9%	Present Value($)
1	3,000	0.9174	2752.2936
2	3,000	0.8417	2525.0400
3	3,000	0.7722	2316.5504
	Total Present Value (A)		7,593.8840
	Initial Investment (B)		5,000.00
	Net Present Value (A-B)		2,593.8840

Since Machine A has higher Net Present Value than Machine B, it should be selected.