Consider a Machine That Costs $20 000,has an Estimated Useful

question 37

Multiple Choice

Consider a machine that costs $20 000,has an estimated useful life of five years with cash flows of $10 000 p.a.and a cost of capital of 10% p.a.A company is considering whether the machine should be replaced every one,two,three,four or five years.The net present value (assuming constant chain of replacement) under each alternative is given as follows:
NPV(1) = $20 000
NPV(2) = $29 000
NPV(3) = $35 000
NPV(4) = $25 000
NPV(5) = $19 000
What is the appropriate action for the firm?

• A)Go ahead with the project.
• B)Do not go ahead with the project.
• C)Go ahead with the project and replace the machine every five years.
• D)Go ahead with the project and replace the machine every three years.

---

Definitions:

Supply Chain

A network between a company and its suppliers to produce and distribute a specific product to the final buyer, involving the flow of materials, information, and finances.

Efficiency

The degree to which an organization or process accomplishes its intended goals with a minimum of waste, expense, or unnecessary effort.

Responsiveness

The ability of a company to quickly adapt to changes in market conditions or demand.

Metric

A standard of measurement used to quantify performance, effectiveness, or efficiency in certain areas or processes.