The directors of J Limited plan to buy a machine costing $550000. The machine has a useful life of four years with no residual value. It is expected that the machine will generate a net cash inflow of $200 000 for each of the first two years, followed by a decrease of 10% in year 3 and a further decrease of 10% in year 4. The cost of capital will be 10%. The discount factors at 10% and 16% are Year 1 Year 2 Year 3 10% 0.909 0.826 0.751 16% 0.862 0.743 0.641

The directors of J Limited plan to buy a machine costing $550000. The machine has a useful life of four years with no residual value. It is expected that the machine will generate a net cash inflow of $200 000 for each of the first two years, followed by a decrease of 10% in year 3 and a further decrease of 10% in year 4. The cost of capital will be 10%. The discount factors at 10% and 16% are Year 1 Year 2 Year 3 10% 0.909 0.826 0.751 16% 0.862 0.743 0.641

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 2P

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