Problem - Capital Budgeting
Mammoth Company is considering the acquisition of two machines
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Machine - Wooly
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Machine - Tusk
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Initial investment
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$224,000
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$225,000
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Additional annual operating revenues
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$90,000
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$150,000
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|
Additional annual expenses
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$25,000
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$85,000
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Terminal salvage value
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0
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0
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Estimated useful life
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5 years
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5 years
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Minimum desired rate of return
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14%
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14%
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Assume straight-line depreciation. Ignore income taxes. The present value of an ordinary annuity and 5 periods is 3.4331. The present value of a dollar at 14% and 5 periods is 0.5194.
Required:
A) Calculate the net present value for both machine
B) What is the appropriate purchasing decision for Mammoth Company concerning the Wooly or Tusk machine?