Question

Aliara Corporation is considering purchasing one of two new machines.

Estimates for each machine are as follows:

		Machine A			Machine B
Investment		$109,000			$154,900
Estimated life		9 years			9 years
Estimated annual cash inflows		$26,600			$39,700
Estimated annual cash outflows		$6,400			$9,800

Salvage value for each machine is estimated to be zero.

Click here to view PV table.

Calculate the net present value of each project assuming a 5% discount rate. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided, e.g. 1.25124. Round present value answer to 0 decimal places, e.g. 125.)

		Net Present Value
Machine A		$
Machine B		$

Which project should the company choose?

Machine AMachine B

Answer 1

Computation of Net Present Value
Machine A
Year	Net Cash	Present Value	Present Value
	Flows	of Annuity at 5%	of Net Cash Flows
1 to 9	20,200.00	7.10782	143,578.00
Less: Initial Investment			109,000.00
Net Present Value			$           34,578.00
Machine B
Year	Net Cash	Present Value	Present Value
	Flows	of Annuity at 5%	of Net Cash Flows
1 to 9	29,900.00	7.10782	212,524.00
Less: Initial Investment			154,900.00
Net Present Value			$           57,624.00

It is advised to choose Machine B, as it has highest net present value than Machine A.

Explanation
Net Cash Flows Calculations
	Cash inflows	-	Cash outflows	=	Net Cash Flows
Machine A	$ 26,600.00	-	$       6,400.00	=	$      20,200.00
Machine B	$ 39,700.00	-	$       9,800.00	=	$      29,900.00