Question

Mrs. Leskoshe, VP of operations at ADM, has to make a decision between two investment alternatives. First investment is to invest on Machine-A and second investment is to invest on Machine-B. Mrs. Leskoshe asked the operations manager Tim Long to provide necessary information for evaluating the two alternatives. After some research, Tim Long produces necessary information in the following table: Initial Cost Labor cost per year Maintenance cost per year Salvage value Machine A $15,000 $2,000 $4,000 Machine B $20,000 $4,400 $800 $2,400 $7,500 It is also assumed that, a) the life of each machine is 3 years, and b) the company thinks it knows how to make 14% on investments no more risky than this one The net present value (NPV) for Machine A= (round your response to the nearest whole number and include a minus sign if necessary). The net present value (NPV) for Machine B = $ (round your response to the nearest whole number and include a minus sign if necessary). Using the net present value method as the basis of comparing the machines, Mrs. Leskoshe should recommend

Answer 1

All figures in the question are amount in $

Given
	Machine A	Machine B
Initial Cost	15000	20000
Labor cost per year	2000	4400
Maint cost per year	4000	800
Salvage value	2400	7500
Depreciation / year	4200	4,166.67
(Initial Cost - Salvage value ) / Life of the machine

Machine A
Year	Flow	Present Value	Discounted factor @ 14%
0	-15000	-15000
1	-6000	-5262	0.877
2	-6000	-4614	0.769
3	-6000	-4050	0.675
3	2400	1620	0.675
	NPV	-27306
Note 1	Depreciation shall not be considered for cash flows
	as it is not affecting cash flows
Note 2	Every year there is an outflow of 6000 i.e.
	Labor - 2000 , Maint - 4000
Net Present value ( NPV ) for Machine A is			-27306

Machine B
Year	Flow	Present Value	Discounted factor @ 14%
0	-20000	-20000
1	-5200	-4560.4	0.877
2	-5200	-3998.8	0.769
3	-5200	-3510	0.675
3	7500	5062.5	0.675
	NPV	-27006.7
Depreciation shall not be considered for cash flows
as it is not affecting cash flows
Every year there is an outflow of 5200 i.e.
Labor - 4400 , Maint - 800
Net Present value ( NPV ) for Machine B is			-27006.7

Using the Net Present Value method , Mrs. Leskoshe should recommend Machine B