Iceland Corporation Limited is considering investing in one of two machines – A or B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 10% per cent.Cash FlowMachine AMachine B $$Initial Cost(6 000 000)(4 500 000)Net Cash Inflows Year 11 000 0001 400 000Year 21 300 0001 600 000Year 32 300 0001 600 000Year 41 200 0001 600 000Year 51 200 0001 200 000Discount factors at 10% per annumYearFactor10.90920.82630.75140.68350.621Required:Calculate the payback period for each machine.Based on the payback method, identify the project in which the company should invest, giving ONE reason for your choice.Calculate the net present value (NPV) for machine A and machine B.Based on the NPV, identify the machine that the company should invest in, giving ONE

Net present value shows the difference between the discounted cash inflows and outflows in a…

Answered: A or B.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

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Iceland Corporation Limited is considering investing in one of two machines – A or B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 10% per cent.

Cash Flow	Machine A	Machine B
	$	$
Initial Cost	(6 000 000)	(4 500 000)
Net Cash Inflows
Year 1	1 000 000	1 400 000
Year 2	1 300 000	1 600 000
Year 3	2 300 000	1 600 000
Year 4	1 200 000	1 600 000
Year 5	1 200 000	1 200 000

Discount factors at 10% per annum

Year	Factor
1	0.909
2	0.826
3	0.751
4	0.683
5	0.621

Required:

Calculate the payback period for each machine.
Based on the payback method, identify the project in which the company should invest, giving ONE reason for your choice.
Calculate the net present value (NPV) for machine A and machine B.

Based on the NPV, identify the machine that the company should invest in, giving ONE

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