Beta Corporation is considering investing in one of twomachines – Machine A or Machine B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 14% per cent. Cash Flow Machine A Machine B $ $ Initial Cost 6 500 000 5 000 000 Net Cash Inflows Year 1 1 000 000 1 400 000 Year 2 1 300 000 1 600 000 Year 3 1 300 000 1 600 000 Year 4 1 200 000 1 600 000 Year 5 1 200 000 1 200 000 Year 6 1,400,000 1,000,000 Discount factor table Year 10% 12% 14% 1 0.9091 0.8929 0.8772 2 0.8264 0.7972 0.7695 3 0.7513 0.7118 0.6750 4 0.6380 0.6355 0.5921 5 0.6209 0.5674 0.5194 6 0.5645 0.5066 0.4556
Beta Corporation is considering investing in one of twomachines – Machine A or Machine B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 14% per cent. Cash Flow Machine A Machine B $ $ Initial Cost 6 500 000 5 000 000 Net Cash Inflows Year 1 1 000 000 1 400 000 Year 2 1 300 000 1 600 000 Year 3 1 300 000 1 600 000 Year 4 1 200 000 1 600 000 Year 5 1 200 000 1 200 000 Year 6 1,400,000 1,000,000 Discount factor table Year 10% 12% 14% 1 0.9091 0.8929 0.8772 2 0.8264 0.7972 0.7695 3 0.7513 0.7118 0.6750 4 0.6380 0.6355 0.5921 5 0.6209 0.5674 0.5194 6 0.5645 0.5066 0.4556
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Beta Corporation is considering investing in one of twomachines – Machine A or Machine B. The initial cost and net
|
Cash Flow |
Machine A |
Machine B |
|
|
$ |
$ |
|
Initial Cost |
6 500 000 |
5 000 000 |
|
Net Cash Inflows |
|
|
|
Year 1 |
1 000 000 |
1 400 000 |
|
Year 2 |
1 300 000 |
1 600 000 |
|
Year 3 |
1 300 000 |
1 600 000 |
|
Year 4 |
1 200 000 |
1 600 000 |
|
Year 5 |
1 200 000 |
1 200 000 |
|
Year 6 |
1,400,000 |
1,000,000 |
Discount factor table
|
Year |
10% |
12% |
14% |
|
1 |
0.9091 |
0.8929 |
0.8772 |
|
2 |
0.8264 |
0.7972 |
0.7695 |
|
3 |
0.7513 |
0.7118 |
0.6750 |
|
4 |
0.6380 |
0.6355 |
0.5921 |
|
5 |
0.6209 |
0.5674 |
0.5194 |
|
6 |
0.5645 |
0.5066 |
0.4556 |
Required:
a. Calculate the payback period for each machine.
b. Based on the payback method, identify the machine in which the company
should invest, giving ONE reason for your choice.
should invest, giving ONE reason for your choice.
c. Calculate the net present value (NPV) for Machine A and Machine B.
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