Question

Suppose company Sith AB must choose between two lightsaber production machines. Machine A costs less than machine B but will not last as long. The cash outflows from the two machines are shown here:

Machine	Date
	0 (€)	1 (€)	2 (€)	3 (€)
A	500	125	125
B	600	100	100	100

Machine A costs €500 and lasts 2 years. There will be maintenance expenses of €125 to be paid at the end of each of the 2 years. Machine B costs €600 and lasts 3 years. There will be maintenance expenses of €100 to be paid at the end of each of the 3 years. The market discount rate is 10%.

Which machine should be chosen and why?

Answer 1

Based on the given data, it can be observed that these two machines have different life periods; Hence, to assess the valuations over other, first the evaluation need to be done with the base of equal life; Hence, incremental approach need to be followed; To consider the same, have extrapolated the projections to equal life (2*3 = 6 years)

Based on the same, and using the discounting factor of 10%, have computed the NPV for these machines; Based on this, the NPV of Machine B is lower negative (Lower cost) than that of Machine A; Hence, it is recommended to choose Machine B