Machine A vs. Machine B: Cash Flow Analysis and Cost of Capital Comparison

Comparing Machine A and Machine B for Solar Air Conditioner Production

Prev Question Next Question

Question

Phoenix Products Inc. requires a new machine to produce a part for a solar air conditioner. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. Cash flow analysis indicates the following:

Year Machine A Machine B -

0-$1,000-$1,000

10 417

20 417

30 417

41,938 417

If the cost of capital for Phoenix Products is 5 percent, which of the following is the most valid statement?

Answers

A. The IRR(A) > IRR(B), therefore accept Machine A.

B. The NPV(A) < NPV(B), therefore accept Machine B.

C. Take neither A nor B since the cost of capital is greater than the internal rate of return.

D. The NPV(A) > NPV(B), therefore accept Machine A.

E. The IRR(A) < IRR(B), therefore accept Machine B.

Show Answer

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D. E.

NPV(A) = $1,938(PVIF(5%,4)) - $1,000

= $1,938(0.8227) - $1,000 = $1,594.39 - $1,000 = $594.39.

NPV(B0 = $417(PVIFA(5%,4)) - $1,000

= $417(3.5460) - $1,000 = $1,478.68 - $1,000 = $478.68.

Therefore, accept Machine A since NPV(A) > NPV(B).

Prev Question Next Question