Question

Pls analysis and determine which machine should purchase. ABC company requires a 12.5% rate of return and uses straight-line depreciation to a zero-book value. Machine1 has a cost of $25,000, annual operating costs of $1,000, and a 3-year life. Machine2 costs $17,500, has annual operating costs of $1,300, and has a 2-year life. No matter which machine is purchased will be replaced at the end of its useful life. Which machine should be purchased and why?

Answer 1

R	12.5%
MACHINE A
Date	Cash Flow	Depreciation	PV @ 12.5%	PV of CF
01-01-17	-25000			-25000
31-12-18	-1000	-8333.333333	0.888888889	-8296.2963
31-12-19	-1000	-8333.333333	0.790123457	-7374.4856
31-12-20	-1000	-8333.333333	0.702331962	-6555.09831
			Sum	-47225.8802
MACHINE B
Date	Cash Flow	Depreciation	PV @ 12.5%	PV of CF
01-01-17	-17500		0.888888889	-17500
31-12-18	-1300	-8750	0.790123457	-7940.74074
31-12-19	-1300	-8750	0.702331962	-7058.43621
			Sum	-32499.177
MACHINE A
Date	Cash Flow	PV @ 12.5%	PV of CF
01-01-17	-25000		-25000
31-12-18	-1000	0.888888889	-888.888889
31-12-19	-1000	0.790123457	-790.123457
31-12-20	-1000	0.702331962	-702.331962
		Sum	-27381.3443
MACHINE B
Date	Cash Flow	PV @ 12.5%	PV of CF
01-01-17	-17500	0.888888889	-17500
31-12-18	-1300	0.790123457	-1027.16049
31-12-19	-1300	0.702331962	-913.03155
		Sum	-19440.192
ABC Ltd. Should go with Machine B as the NPV of Machine B is better with or without depreciation