Question

Machine 1:

- Saves nothing in year 1
- Save you $2,000 in year 2
- Saves $1,000 in year 3
- Assume 5%

What is the PV of the savings for machine 1?

Machine 2:

- Saves nothing in year 1
- Save you $1,000 in year 2
- Saves $2,000 in year 3
- Assume 5%

What is the PV of the savings for machine 2?

Based on the PV of the savings for each machine, which would you buy?

Answer 1

Machine 1
Discount rate	5.000%
Year	0	1	2	3
Cash flow stream	0	0	2000	1000
Discounting factor	1.000	1.050	1.103	1.158
Discounted cash flows project	0.000	0.000	1814.059	863.838
NPV = Sum of discounted cash flows
NPV Machine 1 =	2677.90
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Machine 2
Discount rate	5.000%
Year	0	1	2	3
Cash flow stream	0	0	1000	2000
Discounting factor	1.000	1.050	1.103	1.158
Discounted cash flows project	0.000	0.000	907.029	1727.675
NPV = Sum of discounted cash flows
NPV Machine 2 =	2634.70
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Choose Machine 1 as it has higher NPV