Stainless Shine, a chain of dry- cleaning stores, has the opportunity to invest in one of two dry cleaning machines; Machine A has a four-year expected life and a cost of $50,000. It will cost an additional $6500 to have the machine delivered and installed, and the expected residual value at the end of four years is $4,000. Machine B has a four-year expected life and a cost of $80,000. It will cost an additional $7,000 to have the machine delivered and installed, and the expected residual value at the end of four years is $6,000. Stainless has a required rate of return of 14 percent. Additional cash flows related to the machines are as follows:

Required

a. Ignoring taxes, determine the net present value of investing in machine A.

b. Ignoring taxes, determine the net present value of investing in machine 8. 

c Which, if any, machine should be purchased?

Transcribed Image Text:

Machine A Year 1 $25,000 1,500 3,000 (1,200) Year 2 $25,000 1,500 3,000 (1,200) Year 3 $25,000 1,500 3,000 (1,200) (2,500) Year 4 $25,000 1,500 3,000 (1,200) tem Labor saving Power saving Chemical saving Additional maintenance Additional miscellaneous Machine B tem Year 1 Year 2 Year 3 $32,000 $32,000 2,000 Labor saving Power saving Chemical saving Additional maintenance Additional miscellaneous 32,000 32,000 3,500 (1,500) (2,700) 3,500 (1,500) (2,700) 1,500)