Question

You have been asked to evaluate two machines. The benefits from ownership are identical. Machine A costs $300 to buy and install, lasts for 5 years, and costs $160 per year to operate. Machine B costs $500, lasts for 7 years, and costs $120 per year to operate. Both machines have zero salvage value. Assuming that this is a one-time acquisition, which machine do you recommend if the cost of capital is 15%?

A.	Machine A, the PV is $163 more than Machine B.

B.	Machine A, the PV of its costs is $163 less than Machine B.

C.	Machine A, because the project length is two years less than Machine B.

D.	Machine B, the PV is $163 more than Machine A.

E.	Machine B, the PV of its costs is $163 less than Machine A.

Answer 1

Calculation of NPV
					15%
Year	Machine-A	Machine-B	Incremental cashflow		PV factor, 1/(1+r)^t	PV-Cash Flow-X
0	$             300.00	$       500.00	$            (200.00)		1.0000	$    (200)
1	$             160.00	$       120.00	$                40.00		0.8696	$        35
2	$             160.00	$       120.00	$                40.00		0.7561	$        30
3	$             160.00	$       120.00	$                40.00		0.6575	$        26
4	$             160.00	$       120.00	$                40.00		0.5718	$        23
5	$             160.00	$       120.00	$                40.00		0.4972	$        20
6		$       120.00	$            (120.00)		0.4323	$      (52)
7		$       120.00	$            (120.00)		0.3759	$      (45)
					NPV	$    (163)
Machine A as the PV of its costs is $ 163 less than Machine B
So option B is the right answer.