Question

Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows:_________.End of Machine A Machine BYear1 $5,000 $1,0002 $4,000 $2,0003 $2,000 $11,000Turk Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Turk purchase and why? Hint: This is a two-part question. Part 1. Make sure you calculate the NPV for both machines and Part 2. Which machine should the company invest in and why? .Check: The NPV for one of the two machines will be a negative number. (3 points)Respond to both parts of this problem on the next page.Part 1. Use the tables below to calculate the Net Present Value for each machine.Machine A Net Cash Flows PV Factor PV of Net Cash FlowsYear 1Year 2Year 3Total -------------------------Less: Initial Investment -------------------------Net Present Value ===============Machine B Net Cash Flows PV Factor PV of Net Cash FlowsYear 1Year 2Year 3Total -------------------------Less: Initial Investment -------------------------

Net Present Value ===============
Part 2. Which machine should the company invest in and why?

Answer 1

The second machine should be chosen because the NPV is higher and it has a positive NPV

Step-by-step explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator

For machine A

Cash flow in year 0 = $-9,000

Cash flow in year 1 = $5,000

Cash flow in year 2 = $4,000

Cash flow in year 3 = $2,000

I = 15%

NPV = $-312.57

For machine b

Cash flow in year 0 = $-9,000

Cash flow in year 1 = $1,000

Cash flow in year 2 = $2,000

Cash flow in year 3 = $11,000

I = 15%

NPV = $614.531

The second machine should be chosen because the NPV is higher.

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you