Mars Corp. is choosing between two different capital investment proposals. Machine A has a useful life of
Question:
Mars Corp. is choosing between two different capital investment proposals. Machine A has a useful life of 4 years, and Machine B has a useful life of 6 years. Each proposal requires an initial investment of $200,000, and the company desires a rate of return of 10%. Although Machine B has a useful life of 6 years, it could be sold at the end of 4 years for $35,000.
Year | Present Value of $1 at 10% |
| 1 | 0.909 |
| 2 | 0.826 |
| 3 | 0.751 |
| 4 | 0.683 |
| 5 | 0.621 |
| 6 | 0.513 |
Machine A will generate net cash flow of $70,000 in each of the four years. Machine B will generate $80,000 in year 1, $70,000 in year 2, $60,000 in year 3, and $40,000 per year for the remaining 3 years of its useful life.
Which of the following statements portrays the most accurate analysis between the two proposals?
a.Mars should invest in Machine A because the net present value of Machine A after 4 years is higher than the net present value of Machine B after 4 years.
b.Mars should invest in Machine B because the net present value of Machine A after 4 years is lower than the net present value of Machine B after 4 years.
c.Mars should invest in Machine A because the net present value of Machine A after 4 years is higher than the net present value of Machine B after 6 years.
d.Mars should invest in Machine B because the net present value of Machine A after 4 years is lower and the net present value of Machine B after 6 years.
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