1. Albert Shoe Company is considering investing in one of two machines that attach heels to shoes.
Machine A costs $70,000 and is expected to save the company $20, 0000 per year for six years.
Machine B costs $95, 0000 and is expected to save the company $25,000 per year for six years.
Determine the net present value for each machine and decide which machine should be
purchased if the required rate of return is 13 percent. Ignore taxes.
Solution
Machine A should be purchased because of a higher Net Present Value. (Answer)
NPV of Machine A
Year Cash Flow
P.V. Factor
of 13%
P.V. of Cash
flows
0 $ (70,000.00) 1.00000 $ (70,000.00)
1 $Â Â 20,000.00 0.88496 $Â Â 17,699.12
2 $Â Â 20,000.00 0.78315 $Â Â 15,662.93
3 $Â Â 20,000.00 0.69305 $Â Â 13,861.00
4 $Â Â 20,000.00 0.61332 $Â Â 12,266.37
5 $Â Â 20,000.00 0.54276 $Â Â 10,855.20
6 $Â Â 20,000.00 0.48032
$Â Â Â Â Â
9,606.37
NPV
$Â Â Â Â Â
9,951.00