Question

Company is required to choose between two machines, X and Y. both machines by design are different. Their capacity is the same and can-do same job in all respect.

Machine A cost, 6,00,000 and last 3 years, it cost £ 1,20,000 as running cost.
Machine B cost 7400000 and last for three years. Annual maintenance cost is 71,80, 000.opportunity cost is 10%.
Evaluate machine using NPV method?

Answer 1

To evaluate the machines using the NPV method, we need to calculate the NPV of each machine by subtracting the initial cost from the present value of all cash flows. Machine A has an initial cost of £6,00,000 and annual running cost of £1,20,000. Machine B has an initial cost of £7,40,000 and annual maintenance cost of £71,80,000.

Step-by-step explanation:

In order to evaluate the machines using the NPV method, we need to calculate the Net Present Value (NPV) of each machine. The NPV is calculated by subtracting the initial cost of the machine from the present value of all the cash flows it generates over its lifetime.

For Machine A, the initial cost is £6,00,000 and the annual running cost is £1,20,000. Since the machine lasts for 3 years, the total running cost over its lifetime is 3 * £1,20,000 = £3,60,000. The opportunity cost is 10%, which means the discount rate is 0.10. Using these values, we can calculate the NPV of Machine A.

For Machine B, the initial cost is £7,40,000 and the annual maintenance cost is £71,80,000. Since the machine lasts for 3 years, the total maintenance cost over its lifetime is 3 * £71,80,000 = £2,15,40,000. Using the same discount rate of 0.10, we can calculate the NPV of Machine B.