Chapter 6, Problem 18QAP

Summary Introduction

Adequate information:

Cost of Machine A = $1,980,000

Useful life of Machine A = 6 years

Variable costs of Machine A = 35% of sales

Fixed costs of Machine A= $187,000

Cost of Machine B = $5,400,000

Useful life of Machine B = 9 years

Variable costs of Machine B = 30% of sales

Fixed costs of Machine B= $145,000

Sales of each Machine = $12,400,000

Required return = 10% or 0.10

Tax rate = 21% or 0.21

To compute: Which machine should Company V choose?

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.