Question

Machines J and K have the following investment and operating costs: Year 0 1 2 3 J 11000 1200 1300 K 13000 1200 1300 1400 Which machine is a better buy at a WACC of 10.5%

Answer 1

Machine K

Step-by-step explanation:

The values can be better computed as:

Year 0 1 2 3

J 11000 1200 1`300

K 13000 1200 1300 1400

Using the PV Calculator

The Present Value (PV) for each year in Machine J is as follows:

Cashflow Year Present Value

11000 0 11000

1200 1 1085.97

1300 2 1064.68

Total 13,150.65

The effective annual cost =
`(NPV* r)/(1-(1+r)^(-n))`

`=(13150.65 * 0.1050)/(1-(1+0.1050)^(-2))`

= $7628.16

Using the PV Calculator

The Present Value (PV) for each year in Machine K is as follows:

Cashflow Year Present Value

13000 0 13000

1200 1 1085.97

1300 2 1064.68

1400 3 1037.63

Total 16,188.28

The effective annual cost =
`(NPV* r)/(1-(1+r)^(-n))`

`=(16188.28 * 0.1050)/(1-(1+0.1050)^(-3))`

= $6566.92

Therefore, machine K is better to buy than machine J.