FM Manufacturing Co. considers the purchase of two different types of machines, Machine A and Machine B, to manufacture ball bearings, one of the many products it produces for the car market. Each machine will cost P750,000; will have 5 years economic life with zero salvage value. Both machines will meet the capacity of the projected demand. The operating after-tax cash flow per year of each machine is as follows: Period Machine A Machine B 2 P200,000 P250,000 3 P200,000 P250,000 (P750,000) (P750,000) P100,000 P250,000 P300,000 P250,000 P550,000 P250,000 FM has to decide which of the two machines to buy for the manufacture of ball bearings. The Vice- president for manufacturing was unsure of which method of ranking alternatives to use. Use 3 decimal places for the PV factors.
FM Manufacturing Co. considers the purchase of two different types of machines, Machine A and Machine B, to manufacture ball bearings, one of the many products it produces for the car market. Each machine will cost P750,000; will have 5 years economic life with zero salvage value. Both machines will meet the capacity of the projected demand. The operating after-tax cash flow per year of each machine is as follows: Period Machine A Machine B 2 P200,000 P250,000 3 P200,000 P250,000 (P750,000) (P750,000) P100,000 P250,000 P300,000 P250,000 P550,000 P250,000 FM has to decide which of the two machines to buy for the manufacture of ball bearings. The Vice- president for manufacturing was unsure of which method of ranking alternatives to use. Use 3 decimal places for the PV factors.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section10.A: Mutually Exclusive Investments Having Unequal Lives
Problem 2P
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Which machine should be selected using the Payback period method?
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Machine B
Which machine should be selected using the Accounting
Machine A
Machine B
Which machine should be selected using the
Machine A
Machine B
Transcribed Image Text:FM Manufacturing Co. considers the purchase of two differenttypes of machines, Machine A and
Machine B, to manufacture ball bearings, one of the many products it produces for the car market.
Each machine will cost P750,000; will have 5 years economic life with zero salvage value. Both
machines will meet the capacity of the projected demand.
The operating after-tax cash flow per year of each machine is as follows:
1
P100,000
P250,000
Period
Machine A
Machine B
2
P200,000
P250,000
3
P200,000
P250,000
(P750,000)
(P750,000)
P300,000
P250,000
P550,000
P250,000
FM has to decide which of the two machines to buy for the manufacture of ball bearings. The Vice-
president for manufacturing was unsure of which method of ranking alternatives to use.
Use 3 decimal places for the PV factors.
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