Beta Corporation is considering investing in one of twomachines – Machine A or Machine B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 14% per cent. Cash FlowMachine AMachine B $$Initial Cost6 500 0005 000 000Net Cash Inflows Year 11 000 0001 400 000Year 21 300 0001 600 000Year 31 300 0001 600 000Year 41 200 0001 600 000Year 51 200 0001 200 000Year 61,400,0001,000,000 Discount factor tableYear10%12%14%10.90910.89290.877220.82640.79720.769530.75130.71180.675040.63800.63550.592150.62090.56740.519460.56450.50660.4556 Required:a. Calculate the payback period for each machine. b. Based on the payback method, identify the machine in which the company should invest, giving ONE reason for your choice. c. Calculate the net present value (NPV) for Machine A and Machine B.

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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

Problem 22E

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Beta Corporation is considering investing in one of twomachines – Machine A or Machine B. The initial cost and net cash inflows from each project are shown below. The opportunity cost for both projects is 14% per cent.

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

Discount factor table

Year	10%	12%	14%
1	0.9091	0.8929	0.8772
2	0.8264	0.7972	0.7695
3	0.7513	0.7118	0.6750
4	0.6380	0.6355	0.5921
5	0.6209	0.5674	0.5194
6	0.5645	0.5066	0.4556

Required:

a. Calculate the payback period for each machine.

b. Based on the payback method, identify the machine in which the company
should invest, giving ONE reason for your choice.

c. Calculate the net present value (NPV) for Machine A and Machine B.

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