QUESTION 2

CEVA Logistics in Abu Dhabi is considering two new machines that should produce considerable cost savings in its assembly operations.The cost of each machine is AED150,000 and neither is expected to have a salvage value at the end of a 5-year useful life. Suppose the cost of capital for the machines is 8% and the projected annual cash flows over the life of the two machines are given as,

Year Machine A (Cash Flows in AED) Machine B (Cash Flows in AED)

1 95,000 110,000

2 110,000 96,000

3 82,000 75,000

4 80,000 85,000

5 75,000 84,000

Using the cash flows provided in the table, answer the following questions:

a) Determine the net present value of Machine A. [8 Marks]

Year Cash Flows Discount Factor@8% Present Value of Cash Flows

0

1

2

3

4

5

Net Present Value

b) Caculate the net present value of Machine B. [8 Marks]

Year Cash Flows Discount Factor@8% Present Value of Cash Flows

0

1

2

3

4

5

Net Prese