Smith Company is considering the acquisition of two machines.
Machine A Machine B
Initial investment $200,000 $200,000
Annual operating revenues (end of year) $100,000 $160,000
Annual expenses (end of year) $25,000 $85,000
Terminal salvage value $10,000 $20,000
Estimated useful life 5 years 5 years
Minimum desired rate of return 14% 14%
Assume straight-line depreciation. Ignore income taxes. The present value of an ordinary annuity of one at 14% and 5 periods is 3.4331. The present value of one at 14% and 5 periods is 0.5194.
Required:
A) Calculate the net present value for both machines.
B) Assume there are enough funds to purchase both machines. Should both machines be purchased?
C) Assume there are funds to purchase only one machine. Which machine should be purchased?