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Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows:

End of Year Machine A Machine B
1 $ 5,000 $ 1,000
2 4,000 2,000
3 2,000 11,000

Turk Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575.

Which machine should Turk purchase?

A) Both machines are acceptable, but B should be selected because it has the greater net present value.
B) Only Machine A is acceptable.
C) Both machines are acceptable, but A should be selected because it has the greater net present value.
D) Neither machine is acceptable.
E) Only Machine B is acceptable.

Respuesta :

Answer:

B) Only Machine A is acceptable.

Explanation:

NPV of Machine A =  $9,000 - ($5,000 * 0.8696) - ($4,000 * 0.7561) - ($2,000 * 0.6575) = $312.60

NPV of Machine B =  $9,000 - ($1,000 * 0.8696) - ($2,000 * 0.7561) - ($11,000 * 0.6575) = - $614.30

Since Machine B NPV is negative at minus $614.30, Machine B is therefore not acceptable. Only Machine A is acceptable because it has a positive MPV of $312.60.

The correct option is therefore B) Only Machine A is acceptable.

Tundexi

Turk manufacturing company should purchase only the Machine B.

Computation of PV of cash-flow for Machine A

Year    Cash Flow   PV Factor  PV of Cash Flow

0             -9000               1               -9000    

1               5000           0.8696          4348    

2              4000           0.761              3044    

3              2000           0.6575           1315  

NPV                                                   -$293

Computation of PV of cash-flow for Machine B

Year    Cash Flow   PV Factor  PV of Cash Flow

0            -9000                1                -9000  

1              1000            0.8696            869.6    

2             2000           0.761                1522    

3             11000           0.6575             7232.5

NPV                                                     $624.1

  • Here, the Machine A has negative NPV, thus, should not be accepted. Machine B has positive NPV, thus, it should be accepted.

Therefore, the Option E is correct because Turk manufacturing company should purchase only the Machine B.

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