Problem
Discover Inc. wants to change their equipment to buy a more energy efficient one. They have two machines that they can choose one from, Machine A and Machine B. For both, you have to scrap them after their lifespan is over.
Machine A: Upfront cost = 50,000, annual net cash flow = 14,000, lifespan = 7 years, scrap value = 0.
Machine B: Upfront cost = 50,000, annual net cash flow = 20,000, lifespan = 4 years, scrap value = 5,000.
Cost of Capital is 10%.
1. Which Machine should they buy if it is just a one-time initiative?
2. Which Machine should they buy if it is a recurring situation?
3. What is the NPV of Machine A?
4. What is the NPV of Machine B?