Question

please, I need it with 30 minutes . can someone solve this ASAP and post , I really appreciate.

4. "Machine A has an immediate cost of $15,000, and it will earn a net income of $4300 per year for a total of 7 years. Machine B has an immediate cost of $17,000, and it will earn a net income of $4400 per year for a total of 35 years. Assume that Machine A can continually be replaced at the end of its useful life with an identical replacement. Neither machine has any salvage value. Enter the annual equivalent worth of the machine that is the best alternative if the interest rate is 8.6%. If neither machine is acceptable, enter 0."

Answer 1

Machine B should be selected as it will have higher Npv than machine A. There is no need of calculation. In case of machine A, we need to replace the machine after every 7 years, due to which we have to pay additional replacement cost after every 7 years. This will cause the net present value of the machine A to decrease. Where as in case of machine B there is no replacement cost, due to which it has a higher Npv.

If calculated using financial calculator we get,

Npv of machine A = 16,296.64

Npv of machine B = 31,312.36

Input for machine A in calculator

Cf0= -15000

CF1= 4,300. Frequency= 7

Cf2 = -15000+4300= 10,700 frequency=1

Cf3 = 4300. Frequency = 6

Cf4= 10,700. Frequency= 1

Cf5= 4,300. Frequency = 6

Cf6= 10,700. Frequency =1

Cf7 = 4,300. Frequency=6

Cf8= 10,700. Frequency= 1

Cf9= 4,300. Frequency= 6

Total frequency = 35

I = 8.6

The value $ -10,700 in cashflow represent, that the machinery is replaced this year and the cost of replacement is $-15,000, and income is $ 4,300. The sum of two, give -10,700.

Input for machine B in calculator

Cf0= -17,000

CF1= 4,400. Frequency= 35

I = 8.6%