Question

Managers at Acme Doohickey Co. are considering two projects. Project A: purchase and operation of a new machine, called the Starpunch, for manufacturing Acme doohickeys. The life of this project is three years. Project B: purchase and operation of a new machine, called the Sunspot, for manufacturing Acme doohickeys. The life of this project is two years. The machines have identical capacity and produce the same doohickey. The company only has floor space in its machinists’ shop for one machine. Assume that the appropriate discount rate in 8%, compounded annually. Identify which project, if either, managers should accept, and explain why. Table: Expected Cash Flows for Projects A and B Year A revenue A costs A NCF B revenue B costs B NCF 0 ($35,000) ($30,000) 1 $25,000 ($10,000) $25,000 ($7,000) 2 $25,000 ($10,000) $25,000 ($8,000) 3 $25,000 ($10,000) Note: the table lists net revenue and net cost for each project and each year. But the table is incomplete; you will need to calculate the Net Cash Flows. Accept Project A. Its NPV > 0. Also, when both of the project lifetimes are correctly extended to 6 years, the Project A NPV = $6,559 which is greater than the Project B NPV = $3,218. Accept Project B. Its NPV > 0. In addition, its cost in each year is less than the corresponding cost for Project A. Reject both projects. When both of the project lifetimes are correctly extended to 6 years, the NPV for each project is negative. Accept Project A. Its NPV > 0. Also, when both of the project lifetimes are correctly extended to 6 years, the Project A NPV = $3,656 which is greater than the Project B NPV = $1,241. Accept Project A. Its NPV > 0. Also, when both of the project lifetimes are correctly extended to 6 years, the Project A NPV = $9,373 which is greater than the Project B NPV = $t,662.

Answer 1