Question

Machines J and K have the following investment and operating costs:

Year          0                      1          2          3

J                10000              1100    1200

K               12000              1100    1200    1300

Which machine is a better buy at a WACC of 10%?

Answer 1

Machine J

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$10,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 10%.
• Press the down arrow and CPT buttons to get the net present value.  

Net Present value of cash flows at 10% weighted average cost of capital is -$8.008.26.

Machine K

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$12,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 10%.
• Press the down arrow and CPT buttons to get the net present value.  

Net Present value of cash flows at 12% weighted average cost of capital is -$9,031.56.

No machine should be bought since the machines generate a negative net present value.