Mars CorpIs Choosing Between Two Different Capital Investment Proposals ?
Machine a Will Generate Net Cash Flow of $70,000

question 92

Multiple Choice

Mars Corp.is choosing between two different capital investment proposals.Machine A has a useful life of 4 years, and Machine B has a useful life of 6 years.Each proposal requires an initial investment of $200,000, and the company desires a rate of return of 10%.Although Machine B has a useful life of 6 years, it could be sold at the end of 4 years for $35,000. ? $$\begin{array} { | c | c | } \hline \text { Year } & \begin{array} { c } \text { Present Value } \\\text { of } \$ 1 \text { at } 10 \%\end{array} \\\hline 1 & 0.909 \\\hline 2 & 0.826 \\\hline 3 & 0.751 \\\hline 4 & 0.683 \\\hline 5 & 0.621 \\\hline 6 & 0.513 \\\hline\end{array}$$ ?
Machine A will generate net cash flow of $70,000 in each of the four years.Machine B will generate $80,000 in year 1, $70,000 in year 2, $60,000 in year 3, and $40,000 per year for the remaining 3 years of its useful life.
Which of the following statements portrays the most accurate analysis between the two proposals?

• A) Mars should invest in Machine A because the net present value of Machine A after 4 years is higher than the net present value of Machine B after 4 years.
• B) Mars should invest in Machine B because the net present value of Machine A after 4 years is lower and the net present value of Machine B after 6 years.
• C) Mars should invest in Machine B because the net present value of Machine A after 4 years is lower than the net present value of Machine B after 4 years.
• D) Mars should invest in Machine A because the net present value of Machine A after 4 years is higher than the net present value of Machine B after 6 years.

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