Question

Suppose that ABC Ltd is considering purchasing one of three new processing machines. Either machine would make it possible for the company to produce its products more efficiently. Estimates regarding each machine are provided below: Machine A Machine B Machine C Original cost $79,000 $110,000 $244,000 Estimated life 7 years 8 years 10 years Salvage value Nil Nil $30,000 Estimated annual cash inflows $30,000 $ 60,000 $58,500 Estimated annual cash outflows $ 7,000 $ 35,000 $18,500 A. If the projects cannot be repeated, which machine should ABC Ltd choose based on the NPV criteria at an 8% cost of capital? (9 marks)

Answer 1

Answer:

Explanation:

Machine A

Cash inflow      cash outflow         Net cashflow         Period        PVIF       PV

30000                      7000                  23000                1         0.9259    21296.30

30000                      7000                  23000               2       0.8573       19718.79

30000                      7000                  23000                3      0.7938       18258.14

30000                      7000                  23000                4      0.7350       16905.69

30000                      7000                  23000                5      0.6806      15653.41

30000                      7000                  23000              6       0.6302        14493.90

30000                      7000                  23000             7         0.5835       13420.28

                                                                                                                                   

                                                                                              ∑NPV      40746.51