Jen-Eric Manufacturing Ltd. wants to know the net present value of two different machines they are considering purchasing. Machine 1 will cost $1,000,000 today and will generate the following cash flows:

Year 1	$312,000
Year 2	$463,000
Year 3	$490,000
Year 4	$417,000

            The salvage value for Machine 1 is $100,000 at the end of year 4. The cost of capital is 10%.

Machine 2 will cost $900,000 to purchase and will generate cash flows of $400,000 each year. Its salvage value is $40,000 at the end of year 4.

Calculate the net present value and internal rate of return of each machine.

Based on this information, which machine should the company purchase?

What additional information should Jen-Eric consider before making a decision?

Answer rating: 100% (QA)

To calculate the net present value NPV of each machine we need to discount the future cash flows to their present value using the cost of capital 10 We can use the formula NPV CF1 1i1 CF2 1i2 CFn 1in ... View the full answer