In: Finance
Problem #3
Company needs to decide between two machines.
Machine C costs 10,000 and produce after tax cash flows of 4,000 per year for 3 years. No salvage.
Machine D costs 14,000 and produce after tax cash flows of 3,000 per year for 7 years. No salvage.
Discount rate is 8%
Which machine would you recommend?
Machine C | |||
cost | 10000 | ||
Dicount rate | 8% | ||
n= year | |||
year(n) | cash flow | PVF | Present value |
1/((1+8%)^n) | PVF*cash flow | ||
0 | -10000 | 1.00 | -10,000.00 |
1 | 4000 | 0.93 | 3,703.70 |
2 | 4000 | 0.86 | 3,429.36 |
3 | 4000 | 0.79 | 3,175.33 |
SUM | 308.39 |
Machine D | |||
cost | 14000 | ||
Discount rate | 8% | ||
n= year | |||
year(n) | cash flow | PVF | Present value |
1/((1+8%)^n) | PVF*cash flow | ||
0 | -14000 | 1.00 | -14,000.00 |
1 | 3000 | 0.93 | 2,777.78 |
2 | 3000 | 0.86 | 2,572.02 |
3 | 3000 | 0.79 | 2,381.50 |
4 | 3000 | 0.74 | 2,205.09 |
5 | 3000 | 0.68 | 2,041.75 |
6 | 3000 | 0.63 | 1,890.51 |
7 | 3000 | 0.58 | 1,750.47 |
SUM | 1,619.11 |
as we can see, machine D gives greater return as present value compared to Machine C. So I would recommend Machine D.