Question

Old Southwest Canning Co. has determined that any one of four machines can be used in its chili-canning operation. The cost of the machines are estimated below, and all machines have a 5-year life. If the minimum attractive rate of return is 25% per year, determine which machine should be selected on the basis of a rate of return analysis. Machine First Cost, $ AOC, $ 1 −28,000 −20,000 2 −51,000 −12,000 3 −32,000 −19,000 4 −33,000 −18,000 Machine should be selected.

Answer 1

Computing the NPV of all the Machines

		Machine 1
		Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
	Cash Flows	-28000	20000	20000	20000	20000	20000
Present Value@25%			16,000	12,800	10,240	8,192	6,554
	NPV	25,786
		Machine 2
		Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
	Cash Flows	-51000	12000	12000	12000	12000	12000
Present Value@25%			9,600	7,680	6,144	4,915	3,932
	NPV	-18,729
		Machine 3
		Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
	Cash Flows	-32000	19000	19000	19000	19000	19000
Present Value@25%			15,200	12,160	9,728	7,782	6,226
	NPV	19,096
		Machine 4
		Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
	Cash Flows	-33000	18000	18000	18000	18000	18000
Present Value@25%			14,400	11,520	9,216	7,373	5,898
	NPV	15,407

Therefore Machine 1 should be selected. as it has higher NPV